The MOST Important Word When it Comes to Investing
There are lots of words associated with investing… diversification, time, growth, income, risk, etc. However, there’s one word that is the standout when it comes to getting results - FEES.
The best way for most investors to maximise their returns over the long term lies in minimising fees. The fact is, the less you pay in fees, the more of the money you earn will stay in your pocket, where it belongs.
This is all about controlling what we can control, just as I showed an audience last Monday night, as we looked at just how much difference occurs between paying fees of 0.5% vs 1.5% on long term investment results... we’re talking hundreds of thousands of dollars!
One question... do you know what fees you pay on your superannuation and investments?
Most people who come to see me don’t know what fees they are paying… it’s often not easy to work out what all the fees and costs are in total. Dare I say, it’s made deliberately hard to work out… just try reading through a Product Disclosure Statement or finding what fees you’re paying on your super fund’s website.
Your financial future is too important to risk being wasted by giving your money away in fees which you could avoid. It seems counterintuitive, but when it comes to investing, the reality is the opposite of the age-old marketing slogan – “you get what you pay for”.
Let’s look at how fees and percentages coincide in the real world…
We all have superannuation and we are all paying fees on that money.
Vanguard has found that the median fee being paid by people in Australia is 1.17%. This means a lot of Australians are paying more than that… and in some cases, much more. You can reasonably expect the average super fund to be achieving 7% - 8% returns a year, so let’s work on 8% before fees. If the fee is 1.17%, that actually eats away about 15% of the 8% return. This 15% looks very different to the 1.17% people feel they’re paying! This is precisely why fees are so significant. Getting a return of more than 7% - 8% a year is a separate conversation for another time.
Vanguard also found those fund managers whose fees were in the lowest 10%, charge below 0.45% in management fees. So, if you’re not confident about what your fees are then now is the best time to do something about it because as one of my heroes, Jack Bogle, famously said, "The miracle of compounding returns is overwhelmed by the tyranny of compounding costs."
As Alan Kohler recently said, “most people don’t know what a percentage means”. Banks and super funds certainly do. As I am often telling my clients, it’s important to understand how the system works so you can make the system work best for you.
Fees take a toll on a portfolio. The sooner you can reduce that toll, the better your results will be. It’s been shown that a 1% difference in fees could cost you around a quarter to a third of your capital over your working life!
Everyone has different goals and different degrees of risk they can tolerate, so different people will be invested in different ways… but the science doesn’t lie. On a like-for-like basis, when we compare apples with apples, fees are the key.
There has now been countless research conducted in this area and it’s been demonstrated repeatedly that an investment fund’s fees are the most reliable predictor of its future performance, with low-cost funds delivering above-average performance relative to similar funds … over EVERY time period examined.
Fees are one of the few things we can have direct control over and showing my clients the long-term benefits of getting their money in to low cost, diversified investments, both inside and outside super, is one of the most satisfying parts of my job.
Interested in learning more? Book a free initial appointment and let’s see what difference we can make to your financial future!
Cheers,
Daniel
If you’d like to find out more about how INDEPENDENT financial advice could help you manage cash flow, pay off the mortgage faster, get the most out of super and invest wisely, then get in touch on 0411 484 464 or head to wealthtrain.com.au.
Daniel McGregor is the man behind Wealth Train and is a member of the Independent Financial Advisers Association of Australia. This advice may not be suitable to you because it contains general advice which does not take into consideration any of your personal circumstances. All strategies and information provided are general advice only.
Daniel McGregor and Wealth Train are authorised representatives of Independent Financial Advisers Australia AFSL 464629