Do you know how much you pay or you have paid on fees when you invest your money? If not, you should. Always. In today’s article, we analyze the fees we must pay attention to and we will talk about how large the fees should be in proportion to our investment. As you may know fees can make real troubles in the long run and take a lot of money from your investment.
I have encountered some kind of fees for the first time on my current account, but since I was a student, the fees were neglected. Today I cannot imagine a current account with fees for transferring funds or withdrawing from an ATM. I try to invest free finances and do not keep them in a current account.
Investing in mutual funds can be quite diverse when it comes to fees. There is an entry fee, which can be several percent, for example, the Top Stocks Fund has an entry fee of 3%. There is also a managing fee of 1.95% and the Total Expense Ratio (TER) per year is 2.15%. For an actively managed fund, we need to overcome the benchmark, so higher fees paid in the form of rewards to managers are logical. There are also funds that have a TER of over 5%, that is really a lot.
In the US, for example, we can find Vanguard company, founded by John Bogle, which offers very good investment products (mutual funds and ETFs) with minimal management costs. John is kind of a pioneer in cheap long-term and passive investment. At Vanguard or even at Fidelity, you can find a TER for funds ranging from 0.25% to 1%. This means, that you can find the difference in the TER of 4% or even more.
And now imagine that you are investing 5000 USD with a yield of 9% per year. And your annual management cost is either 1% or 5%, the difference would be around 12 000 USD after 20 years!
Akcie a ETF
It is relatively simple when it comes to shares and ETFs. You usually pay a fixed amount for opening and closing a position, for example $ 2 for opening and $ 2 for closing. Here, the amount may vary by trading volume. Brokers generally do not charge you for managing your account, somewhere you will meet this fee if you don´t do a certain number of trades per month. For ETF, beware of the TER. There are also websites that compare your ETF with others and can find you a cheaper solution.
When buying stocks and ETFs, I always calculate the percentage I pay on fees. For example, I buy 4 BRK shares for $ 200, which is $ 800 total, and I’ll leave $ 4 USD (0.5%) for opening and closing fees. Here I know that on the basis of the volatility the stock can appreciate 0.5% fairly quickly, the appreciation can be up to tens of per cents per year, so I do not care for 0.5% of the investment cost.
Even with a very small amount you can invest on regular and actually cheap bases. For example, buying shares quarterly for $ 500 with a 0.8% opening and closing fee is still in the tolerance. Count the closing fee even without paying for it, because once you want to get out of this investment (it can be in 1 year or 20 years), you must pay this fee.
Physical gold and silver
You are buying the physical gold and silver at the bid price and you can sell it for ask price. Here it depends on the seller, what margin he has on precious metals. The difference is often significant, for example, if you have bought and immediately sold 1 oz golden coin, you are losing immediately about $ 60. There are webpages where you can offer your precious metals and you are waiting for someone who will buy it at your price. Precious metals are worth buying in the portfolio from only a small portion (max. 10%), and only for a longer period of time, to overcome the difference between bit and ask price. An alternative would be to buy an ETF for silver or gold where the fees are lower.
Always be aware of the fees you will pay for the investment and read sentences written with small letters. It is logical that you will pay more for active financial management. Many studies have shown that we pay managers of active funds for working below average, as they cannot overcome the market in the long run. The situation has recently improved with regulations. The most abusive fees are less present, banks and investment companies are fighting between themselves for clients, and this helps to lower fees and improve services. I hereby declare war to all remaining absurd charges. And it is very simple. It is enough to ignore the services of these companies.