Losing Your Investing Returns To Fees?

Part of being a savvy investor means not losing all of your potential returns to fees. Investing fees come in various forms, and today we're going to cover the top two fees that medical professionals often face and the implications for long-term portfolio growth if you incur these fees.

Expense Ratio: The Hidden Cost in Your Funds

The first fee to watch out for is the expense ratio. Every single fund you invest in has an associated expense ratio. It's basically the cost of owning the fund, expressed as a percentage of your returns. For example, if a fund has an expense ratio of 0.3%, you'll pay $30 for every $10,000 you have invested in that fund each year. This might not seem like a lot of money, but these fees can make a huge difference in your portfolio over time.

Imagine you have a $10,000 initial investment, add $10,000 each year, and get an 8% return compounded annually. With a high expense ratio, your after-fee returns will be significantly reduced over the years. My personal cutoff for an expense ratio is 0.2%, but many companies like Fidelity offer index funds with a zero expense ratio, and other firms like Vanguard have even lower rates.

AUM Fee: Understand What You're Paying For

The other common fee is the Assets Under Management (AUM) fee when using a financial advisor. I'm not against financial advisors, but it's crucial to understand the implications of these fees. The industry standard AUM fee is around 1%, but I've seen medical professionals paying as high as 2%. If you are paying an AUM fee, you need to figure out what it is and decide if the cost is worth the value you're receiving.

The Impact of High Fees on Your Portfolio

Let’s look at an example:

• High Expense Ratio: A 1% expense ratio vs. a 0.09% low-cost alternative.
• Initial Investment: $10,000
• Annual Investment: $10,000
• Annual Returns: 8% compounded annually
• Time Frame: 30 years

In this scenario, the difference in expense ratios can lead to a substantial difference in your final portfolio value. Lower fees mean more of your money stays invested and growing over time.

Take a look at these numbers:

Making Smart Choices

Being aware of these fees and understanding their long-term impact is crucial for your investment strategy. By choosing funds with low expense ratios and being mindful of AUM fees, you can maximize your returns and ensure that more of your money is working for you.

So dear readers, always make sure to check the fees associated with your investments and make informed decisions. Your future self will thank you!

Plus, you can avoid losing a million bucks...