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When it comes to investing for retirement, keep an eye on the fees you pay because, over time, they can have a significant impact on the value of your portfolio.
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Consider two investment funds: the first charges an annual fee of 1%, and the second charges 2%. That single percentage point difference is actually quite significant. The fund charging 1% is 50% less than the other fund; or, put another way, the fund charging 2% is 100% more expensive.
The effects of compounding
The impact of fees compounds over time. You don’t just pay extra fees, you lose the growth potential on that money. Let’s compare two $100,000 portfolios earning 8% per year (before fees) for 30 years. The only difference between the two of them is the fees these portfolios pay. Portfolio A pays 1% in total annual fees for a 7% return net of fees. Portfolio B pays 2% in total annual fees for a 6% return net of fees.
- After 10 years, Portfolio A is worth $17,630 more than Portfolio B.
- After 20 years, Portfolio A is worth $66,255 more than Portfolio B.
- After 30 years, Portfolio A is worth $186,874 more than Portfolio B.
The difference in paying 1% more in annual fees is nearly twice as much as your starting portfolio amount! That is the power of compound interest working against you.
The bottom line
No one is going to argue that fees are a part of financial life. Often, you can pay more for a particular portfolio manager’s skill. But, it’s essential to be fee-smart, given not only your portfolio’s costs but also how those costs add up over an extended period of time.
Markets are unpredictable. Costs are one of the only factors within your control. In the end, costs represent dollars that aren’t being invested. Keeping a lid on cost is one of the most effective ways of maximising returns. In an environment of low interest rates and modest investment gains, every basis point matters.
Disclaimer: The 8% average annual straight-line return is for illustration purposes only and meant to show the long-term impact of paying higher investment fees.
The Lawyers Financial Investment Program is issued by The Great-West Life Assurance Company or its subsidiaries and administered by Morneau Shepell Ltd. Lawyers Financial programs are sponsored by The Canadian Bar Insurance Association (CBIA). Lawyers Financial is a trade mark of CBIA and is used under license by Morneau Shepell Ltd. and The Great-West Life Assurance Company.