Many investors spend so much time worrying about investment returns and picking what could be the next star performing fund that they spend little time considering the one thing they can not only control but also one of the biggest determinants of their overall return – the cost of investing.
Whether stock markets go up or down is something that investors can do little or nothing about, however understanding what they are paying for their investments and ensuring this is no more than they need to is one thing that can and should be controlled.
Does it really make a difference?
In a word, yes. A small difference in costs may not make a big difference over a single year, however over time these differences can get compounded and make a huge difference as investments grow.
A £10,000 investment which tracked the FTSE All Share Index over the past 20 years would be worth £34,084 if the annual management charge was 0.1% pa. If the fee increases to 1% pa then the return after 20 years drops to £28,515.
Another way to look at this is that managing costs and using the lower cost investment can boost investment returns by about 20% in the above example.
But costs can be a minefield….
Costs need to be managed, but as with most things in life, simply selecting the “cheapest” may not be the best strategy. If it was that easy we would all drive Nissan Micras and shop in Primark. When it comes to investment costs, you need to be careful that you are comparing like-for-like.
Actively managed funds will generally be more expensive than tracker funds but then they are essentially doing different things and you need to understand what it is you are paying for – and also if it is worth paying for.
Multi-manager or multi-asset funds can also carry additional costs but may well be worth paying for in certain circumstances.
It is very much about minimising costs for your own personal circumstances and investment objectives – not just getting hold of the cheapest investments you can get your hands on.
The price of a platform
Investment costs are rarely the only costs these days as many savers will hold investments on some form of investment platform which will have its own costs. The costs differences between platforms can also be huge and will often vary depending on the size of investment.
Investment platforms can be an ideal way for investors to manage their money and often any additional cost can be worth paying for, however it is important to pick the right one for your circumstances otherwise this could be another way to reduce the returns from your investments.
Navigating the minefield
We know that managing costs is a key step in successful investing and we use independent research systems and have a robust investment process to ensure that our clients pay no more than they need to in charges.
If you would like us to review your current investments to see how they measure up on a cost basis and to help you understand exactly what you are paying for, please do get in touch.
Risk Warning: This article does not contain any specific investment advice. All investments, whatever their cost, carry an element of risk and the value of them can go down as well as up. This means you could get back less than you invested. You should take professional advice to ensure that any investment decisions you make are suitable for your circumstances and attitude to risk.