Compounding fees may be dragging on your returns – Trajan King

Compounding fees may be dragging on your returns

A recent survey of investors found that 21% of investors don’t think they’re paying a lot in fees for their investments. The fact is that most fees from mutual funds and brokerage companies don’t show up on your statement. They are taken out of the funds performance and you don’t have a write a check each years for these expenses, but they are there and they add up.

The companies take the fees out behind the scenes because they want the experience to appear frictionless. This leads investors to not even know what the fees are.

In 2021 investors paid 0.40% on average for mutual and ETFs. This is called the “expense ratio.”

The may seem like a small amount, but just like investments compound, so do fees. That money coming out is money that isn’t compounding.

The SEC calculated an example to illustrate. It takes a $100,000 initial investment earning 4% yearly for 20 years. An investor paying a 0.25% annual fee versus one paying a 1% fee would have an additional $30,000.

This compounding in fees is one reason why low-cost index funds have grown in popularity the past few decades. Several of the Vanguard index funds, for example, have expense ratios of 0.04%. That’s even much lower than the SEC example.

So as we’re nearing the end of the year, it’s worth looking up the expense ratio of your investments to see if you are overpaying.

Who is Trajan King?

CFO & former Wall Street analyst helping your reach financial independence.

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Trajan King

Hey hey. I'm Trajan. I'm a minimalist entrepreneur who loves exploring the world (42 countries), learning new things (7 languages) and trying to get better every day (working on my backsquat).

I write about entrepreneurship and building an optimized and happy life through systems, good habits and scientific research.

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