All investments have a cost, as they say, you have to spend money to make money.
Those fees and charges can make or mar your investment. For instance, of what benefit is investing in an asset with an expected return of 10% when inflation is 8% and transaction fees are 3%. Your net return after fees is 7% while the real return on your investment is actually negative -1%.
Since you can’t control inflation or the markets, you can look for the highest yielding investment but certainly can’t guarantee the final payout in most instances (when you can it’s most likely an extremely low return investment), it then means you are left with one variable – cost.
The few reasons why keeping track of cost is important is because for your investments to be profitable, they would need to return an amount that exceeds all the fees. Also, investment fees compound along with your investment returns, thus implying a higher hurdle to cross.
Unlike goods purchased on the high street and in malls – the investment product with the highest price tag is not necessarily the best. You would expect that the funds that charge higher fees would give you higher returns. However, empirical studies have shown that the reverse is the case. Also, as with most things that you purchase in the open market, the price would differ from store to store. And the only way to get a bargain is to do some research and ask questions.
Some key questions about fees include:
- What are the total fees to buy, sell and maintain this investment.
- What is being charged by competitors/competing products
- How much does this investment have to increase in value before I break-even
- What are the fee-options – per transaction or flat fee
- How are the fees computed – back-end or front end