Most of us already know that fees matter. Yet very few realise just how quietly destructive they can be when you give them 20 years to work against you.
We tend to spend more time debating whether a fund is outperforming the market, or whether a particular ETF offers exposure to the right sectors. The real battle for returns, however, is often fought in the margins. That is exactly where fees sit.
This is why low-cost investing has taken off. It is a direct response to the higher fees embedded in many investment products sold to everyday investors.
Today, anything that costs 1 per cent per year or more is already considered expensive. It may not feel outrageous when viewed as a single line item. But stretch that cost over two decades of compounding, and it morphs into something far more painful.
For Singapore investors in particular, this matters even more. With living costs climbing rapidly, keeping as much of your investment growth compounding for you (and not someone else) has become essential.
So how much can 1 per cent in fees really cost you? Let us break it down.
How A “Small” Fee Compounds Into A Big Problem
Compounding is the reason long-term investing works. When your returns earn more returns, growth becomes exponential. It is why investors love that old line: “The first rule of compounding: never interrupt it unnecessarily.”
The trouble is that fees compound in the same way. And you definitely do not want to follow that same motto when it comes to fees.
Each year, a slice of your returns goes to someone else. It is not just the fee you lose today. You also lose all the future growth that the fee could have generated if it had stayed invested.
Imagine starting with a $100,000 portfolio that earns 8 per cent a year before fees. Leave it untouched for 20 years, and you would end up with just over $466,000. That is about 4.6 times your starting amount.
Now introduce a 1% annual fee. Your effective growth rate drops to 7 per cent. After 20 years, that same $100,000 becomes just under $387,000.
A seemingly harmless 1 per cent fee has quietly eaten close to $80,000 of your final wealth. Scale that up to a $1 million or $2 million portfolio, and the amount lost balloons. This is why fees matter even more as your wealth grows.
Why Fees Are Often Higher Than You Think
Published “management fees” are rarely the whole story.
Many actively managed funds embed additional costs such as trading fees, performance fees or sales charges. These may not show up clearly on the factsheet, but they push the actual cost far beyond what is printed. Investment-linked policies (ILPs) in Singapore often add multiple layers of fees on top of one another. Between fund fees, policy fees, distribution charges and sometimes wrap fees, the total drag on performance becomes significant.
This is also why ILPs and high-commission unit trusts often lag behind simple market-based strategies. Even if the underlying investments perform well, the fee structure prevents compounding from working fully for the policyholder.
On the other hand, a global equity ETF might cost only 0.10 to 0.20 per cent a year. A difference that small looks negligible in year one. Over the decades, it has become enormous.
The Psychology Behind Why 1% Looks Innocent
Humans react strongly to visible, immediate costs. A $5 transaction fee annoys us more than a quiet 1% deduction that only shows up in long-term returns.
Most recurring fees do not feel like real money leaving your wallet. They are not itemised on a monthly statement. You never “pay” them directly. They simply show up as slightly lower returns.
This makes them dangerously easy to ignore.
Since we already struggle to understand compounding when it works in our favour. We underestimate it even more when it works against us. By the time investors realise the impact, years of lost compounding cannot be reclaimed.
Small Fees, Big Consequences
Over 20 years, a 1 per cent annual fee can cost you tens of thousands of dollars. Over 30 or 40 years, or for larger portfolios, the impact becomes life-changing.
For some investors, the difference between a low-cost ETF and a high-fee investment product can determine whether they reach their retirement targets comfortably or fall short.
Investing will always come with uncertainty. But fees are one of the few things you can control completely. Keeping them low is one of the simplest and most reliable ways to protect your long-term returns.
Read Also: Buying US Stocks In Singapore: Guide To Stock Trading Platforms And Brokerage Fees (2025)
Photo Credit: iStock/WANAN YOSSINGKUM
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