Fees: the small number that eats big money
A 1% fee sounds tiny. Over decades it can cost you a fortune.
What you pay
Funds charge an expense ratio: a yearly fee shown as a percentage of what you have invested. It is taken out of the fund automatically, so you never see a bill, which makes it easy to ignore.
A 0.05% expense ratio means $5 a year for every $10,000 invested. A 1% expense ratio means $100 a year per $10,000. Broad index funds often charge very little; many actively managed funds and financial advisers charge 1% or more. There can also be trading commissions, account fees and the bid-ask spread.
Why fees compound
Fees don't just take a slice each year. The money they take can no longer grow for you. So a fee gap compounds, just like returns do, and over decades it can add up to a big share of your final balance.
Returns are uncertain, but fees are certain. That's why, all else being equal, lower costs are one of the few things in investing that reliably help. A higher fee can be worth it if you truly get something valuable for it, like good advice that keeps you on track, but it should be a conscious choice.
Where to find it
Every fund publishes its expense ratio in its fact sheet and prospectus. Look for it before you buy. Fee rules and disclosure vary by country, but the maths is the same everywhere.
Invest $10,000 once. Assume the investments return 7% a year before fees, as a simple illustration.
With a 0.05% fee, you keep 6.95% a year. After 30 years: about $75,000.
With a 1% fee, you keep 6% a year. After 30 years: about $57,400.
Same investments, same market. The higher fee costs about $17,600, nearly twice the original $10,000.
Key terms
- Expense ratio
- A fund's yearly fee as a percentage of your investment, taken out automatically.
- Commission
- A fee charged for making a trade. Many brokers now charge none for stocks and ETFs, but check.
- Prospectus
- The official document describing a fund, including its fees, goals and risks.
Fees are one of the few things you control, and small differences compound into big ones.