Serious academic studies conclude that the best indicator of future investment returns is fees and expenses: the less you pay, the better you will do. However, most firms in my industry don’t want you to know how much you are paying. Here’s how to figure it out.
The four major fees / expenses are:
- Fees paid directly to your adviser, usually a percentage of your account size. You should pay no more than 1% (less for larger accounts), and your adviser should provide comprehensive advice, covering everything from investing to retirement and estate planning.
- Fees charged by mutual funds. The average fund charges 1% annually — a waste of money, in my view. You are much better off in “passive” or “index” funds, which cost only about 0.25%. The high-fee funds claim they will beat the market, but study after study show the vast majority under-perform on a long-term basis.
- Taxes. This is the trickiest item to calculate, but it can cost you 1 – 2.5% in an average year, depending on your tax bracket. Minimize tax by buying “passive” mutual funds (which trade less) and by reducing you own trading activity.
- Commissions and bid/offer spreads. Most brokers charge very low commissions; you should not be paying much at all. The hidden “bid / offer” spread can be larger, but you can keep it low by minimizing buying and selling or by using mutual funds.
If you’re not sure how much you are paying, call me. I can help you do the math. My investing philosophy keeps your fees and expenses low. I have found that, on average, I can save clients over 1% annually. In an environment of 5-8% average annual investment returns, that’s a huge savings. If you want to get into — or stay in — America’s infamous “1%”, a very good way is to minimize your investment fees so you maximize your returns. A small percentage, over time, can make a big difference.