Costs and fees are one of the most important concepts to understand in order to become a professional investor!
We all believe that making money is such an important thing. If this is the case, than keeping money in your wallet is just as important. It makes little sense to make tons of money while it disappears the moment after you have earned it.
The three major enemies on your way to financial freedom are:
- Inflation, as discussed earlier;
- Costs and fees, in all different forms;
- Taxes, in all different forms;
The reason that these three concepts are your enemies is that they are out after your money! Their goal is to try to take as much money from you as possible! The more you learn about these enemies, the less money they will be able to take from you!
Investment performance is not determined by gross return, it is determined by net return after costs, fees and taxes.
In the world of investing every percentage point (0,01%) is called a basis point. Every basis point that you lose to the these enemies is money that you will never get to enjoy! It never reaches your wallet because your enemies have taken it away from you!
There are truly thousands of different costs, fees and taxes. It is nearly impossible to understand all of them and all of their vague terms. We have said earlier that mutual funds for example are marketing experts and try to disguise all of their high fees with fancy words that nobody understands.
Hopefully you start to understand by this point why we are such huge fans of index funds, which have truly awesome performance over the long-term and extremely low costs.
We will now give two example calculations to illustrate all that we have described above.
Our first example is investing a principal sum of $10.000 into an S&P 500 index fund with a fee of only 0,10%. After, we will not invest more money into the index fund. We will assume a compound interest of 8% yearly, which is 7,90% after fees.
Our second example is investing a principal sum of $10.000 into a mutual fund with a high fee of 2%. After, we will not invest more money into the mutual fund. We will again assume a compound interest of 8% yearly, which is 6% after fees.
Finally, we get to the results for both of our examples after 50 years of investment.
Our first example results in $447.788 after 50 years. Our second example results in only $184.202 after 50 years. What a huge difference!
What was the difference between our two examples exactly? Only 1,90% difference in fees!
This 1,90% difference in fees has taken away $263.586 of your potential profits! That is a staggering 59% of your potential profits!
And you thought that a 1,90% difference in fees were no big deal, right?!
We truly hope that we have made the impact of your three greatest enemies in investing crystal clear for you. You must always be on the lookout for these enemies and keep your costs, fees and taxes as low as possible at all times!
Only than can you transfer as much of your profits as possible into your own wallet!