When we think about investing, most of us focus on returns. We will compare funds based on performance, review historical gains (even though we are reminded that historical returns should not be used to forecast future returns), and estimate how much our portfolio can grow over time. After all, the whole point of investing is to grow our wealth.
But there is another side of the equation that often gets far less attention. Fees.
This is not because fees are unimportant. In fact, they directly reduce what we earn. The higher the fees we pay, the lower our net returns will be, assuming everything else remains the same. Yet, because fees are often expressed as small percentages, they often feel insignificant and easy to ignore.
That instinct can be very costly.
Why Small Fees Feel Harmless But Are Not
A fee of 0.5% or even 1% a year does not sound like much. In dollar terms, especially at the start of an investing journey, it may amount to only a few dollars per month. Compared to market fluctuations, the cost can seem negligible.
However, investing is a long-term activity. Just as consistently investing small amounts can compound into a large portfolio over decades, small fees can compound in the same way, except this time, they work against us.
The Cost Of Paying 1% More
Assume an investor contributes $1,000 every month into a diversified portfolio, earning a long-term average return of 5% per year. This is a reasonable assumption for a balanced, long-term investment strategy.
If the investor pays an annual fee of 0.6%, which is in line with some robo-advisory platforms such as Endowus, the portfolio could grow to about $546,942 after 25 years. For a 40-year-old starting today, this means a good chance of accumulating more than half a million dollars by age 65.
Instead of paying 0.6% in fees, the investor now pays 1.6% per year because he invests through a platform that is stacking multiple layers of fees. At the end of 25 years, the portfolio is projected to be around $473,161. That is a difference of $73,781, simply due to paying 1% more in fees.
Why A 1% Difference Leads To A Much Bigger Impact
At first glance, this may seem counterintuitive. If fees increase by 1%, why does the final outcome drop by more than 13%?
The answer lies in compounding.
Each year, fees reduce not just your returns for the year, but also the base on which future returns are generated. Over time, this creates a compounding drag effect. You are effectively earning returns on a smaller and smaller base compared to a lower-fee scenario.
That is why the impact feels disproportionately large. A 1% higher fee does not just mean 1% less return. Over long periods, it compounds into a much bigger gap. Keeping fees low is not just about squeezing out a tiny improvement for the year. It is about making sure your portfolio retains more of the returns so that it has the best chance to grow to its full potential over time.
You May Need To Invest More
Another way to understand the impact is to ask a practical question. If you are paying higher fees, how much more do you need to invest to achieve the same outcome as someone who is paying a lower fee for the same portfolio?
In this example, the investor paying 1.6% in fees would need to increase their monthly investment from $1,000 to about $1,150 to reach a final portfolio value similar to that of someone paying 0.6%. That is roughly 15% more per month, just to offset the additional 1% in fees each year.
Looking Beyond Returns Alone
It is natural to focus on returns when evaluating investments. However, returns are uncertain and influenced by market conditions. Fees, on the other hand, are certain. They are deducted regardless of whether markets go up or down.
This makes fees one of the few variables within our control.
In Singapore, investors have access to a wide range of options, from robo-advisors and unit trusts to ETFs and brokerage platforms. Each comes with its own fee structure, whether it is management fees, platform fees or transaction costs.
Understanding these costs and how they add up over time is just as important as choosing the right asset allocation. A 1% difference in annual fees may not seem significant at first glance. But over a 20- to 30-year investment horizon, it can mean tens of thousands of dollars less in your portfolio.
Investing is not only about maximising returns. It is also about minimising unnecessary costs. By paying attention to fees early, you give compounding a better chance to work in your favour, rather than against you.
If you are considering robo-advisory platforms such as Endowus or StashAway, DollarsAndSense has partnered with these platforms to offer exclusive promotions that can help reduce your investment fees. You can find more details through the links provided.
Photo Credit: iStock/Worawith Ounpeng
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