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.
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%!
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