- 27th Jun 2014
Recognise the importance of costs #investmentprinciple5
Maximise your wealth not your costs
You know that investing fees diminish your return on investment and even a small reduction in fees can have a significant impact on the return on investment over the longer term. If you’re serious about investing you need to understand the impact charges can have on your money.
Understanding the true impact on your return on investment
Even a small increase in annual charges, can seriously add up over the years you’re saving. This is because the main annual charge you pay is set as a percentage of the money you’ve invested. As your money grows, the amount you pay increases.
Here’s a scenario to show you how the charges add up.
Mark has £10,000 to invest. He’s still got 25 years to go to retirement, plenty of time for his money to grow further and for this illustration I’m assuming his money grows at a steady 6 per cent a year. (Of course that’s completely unrealistic. Stock markets and share prices swing up and down, you’d never get a constant 6% unless you were in a high interest savings account, and there are no savings accounts paying anywhere near 6% today.)
With no costs and an annual rate of 6 per cent Mark’s return on investment is nearly 46,500 pounds over 25 years.
In real life there are investment charges. Let’s look at what happens with annual charges of half a percent, 1 per cent and 2 percent:
At half a per cent Mark pays £6,500 in total charges over 25 years.
- Double that annual charge to 1 per cent and Mark pays nearly £10,800. That’s more going in charges than the amount originally invested
- At 2 per cent total costs increase to nearly £18,000.
As charges rise, investment returns fall:
- With a half a per cent charge Mark’s £10,000 grows to £38,100.
- At 1 per cent Mark ends up with nearly £33,900.
- At 2 per cent Mark is left with £26,500.
Having looked at these figures you can see why it is so important to understand all of the charges being levied against your investment portfolio. Put simply, charges add up and can have a significant impact on your return on investment.
What is the true cost of investing?
There have been significant improvements over the last few years in the way that fees have to be disclosed but there are a wide range of costs that can be incurred by you, the investor and it’s no wonder that sometime the devil gets lost in the detail.
An investor could quite easily be paying for a range of services that aren’t particularly apparent; not only does the fund you are investing in take a charge but the platform you invest through, the Adviser you rely on and even a specialist ‘discretionary’ manager could be in on the act too. By the time all these firms have taken their slice the overall cost of investing could be in the region of 2.5% to 3%.
Costs have a considerable impact on the return on investment you can expect to receive and you need to understand and appreciate them as soon as possible. Costs are far more than just management fees and it pays to know exactly what you paying for – it is your money after all.
Past performance is not an indication of future returns. The value of investments and any income from them is not guaranteed and can go down as well as up. If you have any questions about the suitability of an investment, you should seek financial advice.