When investing, it’s easy to get caught up in the excitement of getting a strong return and lose sight of one very important component: how much it costs.
I’m not talking about the funds you initially put in an investment, but the fees and costs associated with investment products and services.
These fees may seem small, but over time they can have a major impact on your investment portfolio.
The Securities and Exchange Commission put together an example to illustrate how a $100,000 portfolio with a 4 percent annual return over 20 years would be affected by fees.
With an ongoing fee of 0.25 percent, the portfolio would total about $210,000 in 20 years, the SEC said.
But a fee of 0.50 percent would slice that by $10,000 over 20 years.
The impact of a 1 percent fee would be even more severe, cutting the portfolio by almost $30,000 over 20 years, the SEC said.
That should convince you.
Fees typically come in two types: transaction fees and ongoing fees.
Transaction fees are charged each time you enter into a transaction. One example is when you buy an individual stock or mutual fund.
“As with any fee, transaction fees will reduce the overall amount of your investment portfolio,” the SEC said.
Ongoing fees or expenses are charges you incur regularly, such as an annual account maintenance fee.
Ongoing fees can also reduce the value of your investment portfolio.
“This is particularly true over time because not only is your investment balance reduced by the fee, but you also lose any return you would have earned on that fee,” the SEC said. “Over time, even ongoing fees that are small can have a big impact on your investment portfolio.”
Find out what you may be charged by reading what your financial professional provides you. For example, look at your account opening documents, account statements, confirmations and any product-specific documents to see the types and amount of fees you are paying.
Here are questions you should ask to get informed about fees:
Is there a fee schedule that lists all of the fees that will be charged for investments and maintenance of this account?
Will you pay fees to purchase, hold and sell an investment? Will those fees appear clearly on your account statement or confirmation? If not, how will you know about them?
How can you reduce or eliminate some of the fees? For example, can you buy the investment directly without going through a financial professional? Can you pay lower fees if you open a different type of account?
Do you need to keep a minimum account balance to avoid certain fees?
Are there any other transaction or advisory fees? How about account transfer, account inactivity, wire transfer fees or any other fees?
How do the fees and expenses of the product compare to other products that can help you meet your objectives?
How much does the investment have to increase in value before you break even?
You may not be able to avoid fees altogether. But if you do your homework you can minimize them.
So don’t get so excited over investment returns that you overlook the impact of fees that could wipe out what you’ve earned.