Investment Expenses Matter More Than You Think

Costs and expenses play an important part in our every day lives.

When costs are clear and understandable, they are usually a major aspect of buying a product or a spending decision.

When you book a hotel, rental car or airline ticket, the costs are clear and likely factor into what reservation you make.

When we buy gas, each of us generally compares gas stations to check prices. It makes sense, right, as we don’t want to overpay.

However, even if there was a 10 cent per gallon price difference every time you fill up, it would only save the average person about $50 per year, if you drive 12,000 miles per year and get 25 miles per gallon. Lots of effort goes into saving $50 or so per year.

But you can decide to understand and minimize your investment expenses, which could save you hundreds of thousands of dollars, or even more, over many years.  Investment expenses are not usually fully understood and are not clearly stated. So you may not really understand the total costs of your investments.

If you invest $2 million over 10 years and it grows at 7% per year, you would have $3,934,000. But what if your investment expenses were .5% higher during the same time period? Due to the higher expenses, and reduced returns, you would have $3,754,000 or $180,000 less. Is that worth it, to understand your expenses?

If you had $5,000,000 and invested it for 10 years at the same 7% growth rate, it would grow to $9,835,000. If you selected investments with .5% higher expenses, it would cost you almost $450,000 over ten years ($9,835,000 versus $9,386,000).

When we select the investments that we recommend for our clients, the investment performance, costs and tax impact are primary factors.

When we evaluate other investments owned by prospects or for some clients who hold certain assets other than at our firm, we see a common pattern over and over. The investment costs of these other investments, such as the internal expense ratios of mutual funds, are almost always significantly higher than the expense ratios of the mutual funds that we recommend. This would be fine, if these mutual funds had better performance records. However, that is usually not the case. Most times, prospects are paying more in expenses and getting worse performance returns, but they do not realize either of these things.

If you are a client, you should know that we utilize some of the lowest cost investments available, which have also provided excellent long term investment returns, as compared to their respective benchmarks and comparative mutual funds.

If you are not a client, we would be pleased to review your current portfolio with you. In the long term, understanding the costs you are really incurring, whether out of pocket or within a mutual fund or annuity, can be worth huge amounts of money. Understanding your costs and your actual performance can be worth thousands or even millions, over many years, depending on the size of your portfolio.

The next time you need to get gas, think about the effort you are making to compare prices. Are you making the same effort to understand your investment costs?

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