The Hidden Costs of Investing: How Fees Can Devour Your Returns

All our focus is on the returns we can earn when choosing an investment. But we often forget to be mindful of the costs that accompany all investment options. We neglect the impact of the costs of borrowing money. The insidiousness of fees is that they look insignificant at first. Fractions of a percent and a few dollars here and there don't seem like a big deal.

But over time, these fees add up to significant amounts. And when you consider the compounding effect, these small fees can make a big difference in the overall performance of our portfolios and our debts. Let's review a few examples.

Let's say you have $50,000 for a downpayment and need to borrow the rest to buy a house. The total mortgage payment on a loan amount of $350,000.00 with a 5% interest rate over 30 years will be $676,395. In addition to the $350,000 loan amount, you will pay $326,395 in interest over the life of the loan.

If you were to take out the same loan but with a 4% interest rate, the total repayment would be $601,543. This reduction in interest results in savings of $74,852 compared to the 5% interest rate.

High fees can exacerbate the situation when you rely on compound interest to grow your savings. This chart illustrates the impact of ongoing costs over 40 years on retirement investments with $1500 monthly contributions and a 7% annual return, with fees of 0.10%, 0.50%, and 1%.

An annual fee of 0.5% can reduce the portfolio's value by $340,733, while a 1% fee can result in a reduction of more than $716,392, compared to a portfolio with a 0.10% annual fee.

Ignoring the fees can result in a substantial reduction of your returns and savings over time. It's important to understand the costs associated with your investments and factor them into your overall financial plan.