We had published a post on one of our main blogs recently where we calculated the impact of saving 1% in fees annually. Of course, depending on how much money you have to invest, the impact of 1% will be significantly different.
How Much Are We Talking About?
In the post that you can read, you will see that in that case, for an investor that had $100,000 and invested $12,000 per year, the difference amounted to over $600,000. Compounding has a major effect and also the fact that in the later years, when an investor has $1,000,000 invested, a 1% difference is $10,000. That is very significant. How some investors can not take the time to look at such savings is beyond me. Since most financial advisors have conflicts of interest, they will rarely direct you to the best and cheapest alternative. In a perfect world they would, but they rarely do in reality. I don’t know too many individuals that would not take the time if it meant saving $600,000 once they reached their retirement.
Can You Really Save 1%?
I personally think 1% is a very conservative amount. Studies have shown that most mutual fund investors end up paying north of 2% in annual fees on their holdings. Compare that to ETF’s which very rarely charge more than 0.50% if you choose them well and you will see that the 1% figure is probably too conservative. Add to that fees to enter and exit positions, all types of maintenance, fx conversions and you will start to get an idea of just how much you are paying to have that money managed by someone else.
So Will I Automatically Save On Fees?
No, you will not. While building an ETF portfolio means savings tons in annual fees, it also means trading fees which means that smaller portfolios will end up paying commissions that can end up being significant. Of course, as the portfolio becomes bigger, the commissions are likely to remain more or less the same meaning that as the portfolio gets bigger, the fees in % will drop significantly.
That being said, paying an 8$ commission on a trade but the saving 1-1.5% year after year seems like a great deal to me, don’t you agree?