Fees are one of the most important factors in investing. As I often say, investing outcomes aren’t certain. Fees are.
Wise investors always look to minimize the fees they pay. After all, when you invest, you’re putting your hard-earned money on the line. It’s only natural that you’d want any returns to end up in your pocket, not someone else’s.
Unfortunately, it can be difficult to pin down true investing costs, beyond perhaps looking at the annual operating expenses on your mutual funds or exchange-traded funds (ETFs). If only that were the end of it. Fees and expenses can creep up all over the place—in trading commissions, sales loads for mutual funds and excessive markups on bonds— and they can even be buried in complex products like alternative investments or hedge funds.
So what can you do? Start by asking questions. And listen for answers that don’t make sense. Statements like “don’t worry about fees, we don’t charge any,” or “fees don’t really matter, what counts are your net returns,” might not hold up under scrutiny.
The reality is that high fees or expenses can be a real drag on your investments’ growth over your lifetime.
Consider the case of a hypothetical 30-year-old investor with a $100,000 portfolio who is earning average returns of about 6% a year and plans to retire at age 70. If she pays annual investment expenses of 2% over the next 40 years, she’ll end up with about $458,000.1 However, cut that annual expense load to 1% and her portfolio would grow to $688,000—50% more.
This isn’t cause for despair. Expenses are an unavoidable part of investing, after all. But it is a reason to be careful. We all benefit when we ask tough questions: Is a lower-cost alternative available? Am I getting good value for my money? Do I understand exactly what I am paying for and what I am receiving in return?
At Schwab, we welcome questions like this. We are committed to fee transparency and driving down investment costs. And we bring that commitment to life through our low-commission or commission-free offerings and low investment-advisory fees.
So ask us your tough questions. Talk with your Schwab Consultant about ways you can reduce your expenses and increase the value you receive. Don’t let a lot of small costs drain your portfolio. You have choices.
1 Schwab Center for Financial Research. The example is hypothetical and provided for illustrative purposes only. It is not representative of any specific investment or product and takes no account of dividends, interest or taxes. Past performance is no guarantee of future results.