Fees are an inevitable reality when investing, but knowing why fees are bad is important so that you can minimize their effects. In this weeks episode we channel our inner Guardians of the Galaxy to explain why fees are bad. For those of you who would rather read, the details are below, but I star as Gamora and rocket…it’s pretty amazing. But, here’s what we go over….
Why are fees bad.
Well, the higher a fee on a fund, the better it needs to perform to overcome the cost of the fee. And these fees have a cumulative effect from year to year. Higher fees cut into profits which dip into any gains. So if two funds have identical performance, the one with the higher fees, well, that comes right out of your pocket. Plus, regardless of fund performance, whether profit or loss in any given month, the fees are due.
Spotting bad fees.
There are ways to spot bad fees. The first way is a lack of transparency. These plans seem simple, but they are inherently vague in their marketing. It’s hard to figure out the details and what you are actually investing in.
The second way to spot bad fees, complexity. These plans have so many options, indexes, exceptions, etc. They drown you in details that may or may not matter, but specific information is hard to get.
You also need to be wary of over-simplified plans. These plans are simple, but detailed, but you can end up over paying and losing control by letting some one ‘just-take-care-of-it’ for you.
Low fee providers.
The best way to protect yourself from high fees is to seek you low fee providers. There are ways to find low free providers, but you have to seek them out. They don’t waste money on advertising, nor do they employ high dollar fund managers.
For example, Vanguard vs. American funds. In our current portfolio, Vanguard averages 0.19% in fees. This is because all except our emerging market funds are indexed rather than managed. Although Vanguard’s Emerging Markets fund is 0.92%, we are OK with the higher fee for that asset class because, due to risk, it is actively managed. Emerging Market funds are inherently risky, so fees will always be higher, but depending on your portfolio goals…well that’s a topic for another day.
On the other hand, our American Funds, which Kelly had before we met, average 0.73% in fees. In order for these funds to perform at the same level as our Vanguard Fund, they have to consistently perform .5% better than our Vanguard to make up the difference in fees. And, they have to do this every month, every year.
It seems obvious that higher fees would be a not so good thing, but some people think you get what you pay for. In many cases that is true, but when profits compound based on earnings, every dollar you save is a dollar earned. Minimizing your exposure to fees is a great way to keep more money in your pockets.
We’d love to know your thoughts on fees, or the episode, or how fabulous of a dancer I am….just leave a comment!
Thank you for watching!
Steffan (& Kelly)
P.S. We hope you enjoy the episode! We post financial updates once a month, so if you don’t want to miss them, please subscribe to our Living the Middle channel on YouTube, right now!