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Taking a $40,000 Investment Hit

By on March 31, 2014
Categories: FINANCIAL PLANNING

Can you afford to waste an extra $10,000 in unnecessary investment fees? Or how about $25,000 or $50,000 or perhaps even $100,000 in extra fees?

Over their investing lifetime, many Americans unwittingly end up paying tens of thousands of dollars or more in extra fees by investing in overpriced mutual funds.

One reason why millions of investors remain unaware of the financial impact of paying even modest fees is because they never receive a bill. The mutual fund fees are automatically taken out of investors’ accounts, which can make these funds seem like they are free.

A new investor bulletin from the U.S. Securities and Exchange Commission, however, is warning Americans that even fees that seem small will have a major impact on a portfolio.

To illustrate this phenomenon, the SEC calculated the impact of annual fees for a $100,000 portfolio, growing at 4% a year, that charged .25%, .50% and 1%. Without the drag of any fees, the portfolio, thanks to the power of compounding, would have grown to nearly $220,000 over 20 years.

With annual fees of 1%, the value of the hypothetical portfolio would have dropped by roughly $28,000. The damage, however, would have actually been greater. The SEC also calculated the lost return of that $28,000 since it was no longer in the portfolio. Doing so added another $12,000 into the lost column. So 1% in expenses would have generated a total loss of $40,000.

This graphic from the SEC’s bulletin shows the 20-year financial hit that portfolios would have absorbed based on fees ranging from a small .25% up to 1%. Keep in mind that the average mutual fund fee, which is referred to as an expense ratio, is 1.26%.

 

 

You can see what impact fees can have on individual mutual funds and exchange-traded funds by using FINRA’s Fund Analyzer, which maintains a database of more than 18,000 funds.

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