Do investment costs really matter?

If you pay an extra 0.5%, 1% or 1.5% if can’t make much difference, right? Wrong, it really does make a difference.

Here is an example

If you invest £1000 a year for 25 years compounded at 10% you would have £109,182.

Investment costs calculation with no charges

Now if you paid just 0.5% per annum in investment costs you would have £8268 less.

If you paid only 1% per annum in investment fees you would have £15,858 less. That is not a small difference.

Even 1.5% in costs doesn’t sound like much but you would be left with only £86,355. So 1.5% in investment charges could cost you as much as £22,857 or 21%!

Investment costs calculation with 1.5% costs

What are the different investment fees?

  • Management fees – this the fee the stockbroker or platform charges for managing your account. These can range from 0.25% to 1%.
  • Product fees – different investment products have different costs. An index fund might charge as little as 0.1% but an investment trust or hedge fund might charge 1.5%+.
  • Dealing charges – different platforms have different charges. eToro have no charges for buying stocks, where as Charles Stanley Direct have a £11.50 dealing charge.
  • Other fees – a financial advisor might charge upto 1.5% and some platforms charge reinvestment fees.

Investment costs Conclusion

Investment costs really do matter. Their importance increases with time.

If you invested £100 per week for 50 years at 10% you would have just over £6,000,000. If you paid 2% in charges you would have less than £3,000,000. So just 2% could you cost over 50% of your investment return or £3,000,000.

All platforms, brokers and products have different charges so shop around just as you would if you were buying a new car.

Do your best to minimise your costs.

What to do next: Read the 5 best investing books for beginners