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How A 1% Investment Fee Can Wreck Your Retirement – Forbes

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Investment fees are easy to ignore. You don’t get billed for your advisor’s fee or the expense ratio of a mutual fund. They quietly take it out of your investment portfolio every quarter. Yet fees can have a huge impact on your wealth. 

In this article, we are going to examine four aspects of investment fees. First, we’ll look at the numbers to see just how big an effect seemingly small fees can have on your wealth. Then we’ll consider whether high investment fees translate into better returns. Third, we’ll look at how to determine the investment fees you currently pay. And finally, we’ll look at a free tool that I use every day that includes an investment fee analyzer.

Investment Fees Matter

Even a 1% fee, over a lifetime of investing, can significantly reduce the value of a portfolio. Using Vanguard data, we know that from 1926 through 2019 an 80% stock and 20% bond portfolio returned 9.7% a year. Let’s imagine we invest $1,000 a month over a 40-year career. Using this savings calculator, we know that the portfolio would grow to about $5.8 million.

Yes, compounding is a beautiful thing.

Let’s now assume we pay an advisor 1% of our investments for their services. That’s a standard fee in the industry, although you can find less expensive and more expensive advisors. The result is that on an after fee basis, our returns drop from 9.7% to 8.7%. The result is a portfolio of just $4.3 million. The one percent fee cost us about $1.5 million, or 25% of our wealth.

Fees matter.

In the above example, we didn’t consider mutual fund fees. If our advisor invested our money in mutual funds that also charge a 1% expense ratio, our wealth would fall further, down to about $3.2 million.

High Fees Do Not Generate Better Returns

In defense of fees, some argue that higher fees generate better returns. Studies do not support this conclusion. A study by S&P Global published in 2020 found that actively managed funds underperformed their respective index over a 10-year period:

Large-cap funds made it a clean sweep for the decade—for the 10th consecutive one-year period, the majority (71%) underperformed the S&P 500. Their consistency in failing to outperform when the Fed was on hold (2010-2015) or raising (2015-2018) or cutting (2019) rates deserves special note. Of the large-cap funds, 89% underperformed the S&P 500 over the past decade.

The results for mid-cap and small-cap funds weren’t much better: “84% of mid-cap funds and 89% of small-cap funds underperformed over the longer 10-year period.”

Studies by Morningstar have similar results.

How to Find a Mutual Fund’s Expense Ratio

Determining a mutual fund’s expense ratio is easy. As a starting point, a prospectus will include this information. Most 401k and other workplace retirement accounts should also provide this information. If you know the ticker symbol of the fund, you can also find the expense ratio on Morningstar. I have a video series that walks you through how to use Morningstar’s free tools.

Keep in mind that the expense ratio is not the only fee a mutual fund will charge. They also charge transaction fees that aren’t reflected in the expense ratio. That’s another reason to favor low-cost index funds. They tend to trade less frequently than actively managed funds, keeping transaction fees lower.

As for advisors, make sure you understand the fees they are charging you. If you don’t know what they are, ask.

Free Fee Analyzer Tool

Finally, there is a free tool you can use to evaluate your investment costs. It’s called Personal Capital. One feature of the tool is called the Retirement Fee Analyzer. Once you connect all of your investment accounts, the tool determines the expense ratios of all of your investments. It shows you this information for each fund and it calculates the weighted average expense ratio for your entire portfolio.

Beyond the data, Personal Capital also provides two tools to evaluate your investment fees. First, it compares your fees to a benchmark. Personal Capital uses 0.50% as its benchmark. More importantly, it shows how the fees will impact your wealth over time. Here’s what it looks like.

Keep in mind that the Fee Analyzer does not factor in any advisor fees you may be paying. It just looks at the expense ratios of the funds that are in your portfolio. If you pay an advisory fee, be sure to include that in your calculations.

Final Thoughts

It’s easy to forget about investment fees. Yet they are one of the most important aspects of investing. They are also a great indicator of returns. The lower the fees, the higher your returns, in most cases. That’s why index funds are such an important part of long-term investing.

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Investment

Tesla shares soar more than 14% as Trump win is seen boosting Elon Musk’s electric vehicle company

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NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.

Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.

“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”

Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.

Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.

Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.

Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.

In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.

The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.

And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.

Tesla began selling the software, which is called “Full Self-Driving,” nine years ago. But there are doubts about its reliability.

The stock is now showing a 16.1% gain for the year after rising the past two days.

The Canadian Press. All rights reserved.

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S&P/TSX composite up more than 100 points, U.S. stock markets mixed

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TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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S&P/TSX up more than 200 points, U.S. markets also higher

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TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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