How costs can add up
There is quite a bit of truth to the old adage “there is no free lunch in life” or its more recent equivalent “if you’re not paying for the product, you’re the product” because pretty much everything in life comes at a cost these days.
Which is probably why many of us ascribe a certain value to items we pay for, in a sliding scale, depending on what we pay for the product. In other words, the more we pay for something, the more valuable we tend to think it is. And following that train of thought, the more we pay for something, the more likely it is to be of a certain quality.
But while that might hold true for items like clothing, cars or computers, the same cannot be said for investment products. When it comes to investing, if all other factors are equal, an investor would likely be better off choosing the product that costs less. Because every dollar paid in costs, is a dollar less in returns. And over time, these costs do add up.
The chart below illustrates just how much these costs add up over 45 years for a portfolio that returns an average of 5% annually, before costs. The difference of 0.33% in a fund’s management expense ratio (MER) does not seem like much at first but over the course of the long-term, it does add up… to nearly $80,000.
Source: Vanguard, using data from Morningstar.
Note: The portfolio balances shown are hypothetical and do not reflect any particular investment. The final account balances do not reflect any taxes or penalties that might be due upon distribution. Assumption: 5% returns less MER. The example is illustrative only and is based on the factors stated.
But MERs are not the only costs in investing. Generally, there are two types of costs or fees that investors should be aware of, transaction fees and ongoing fees.
Transaction fees are fees charged every time you execute a transaction. For instance, brokerage costs or spreads if applicable, when you buy a managed fund or ETF.
Ongoing fees are expenses that are incurred on a regular cadence, such as an annual account maintenance fee, custodian or administrative fee.
It is also important to note that the focus on fees is not limited to investments outside super but also your superannuation fund. If you’ve selected a specific super provider for its low MER, make sure that you’ve also looked at other possible costs such as contribution fees (the fee on each extra sum you put into your investment), administrative fees or any other fees you might be charged.
So just like how it makes sense to shop around for the best price on a car, computer or service, make sure you do your research and calculate how much you are paying in investment costs. And if you find a better provider or fund, be sure to consider the consequences of selling out of your existing fund or transferring your assets before you make the move.
Vanguard
vanguard.com.au
Latest Newsletters
Hot Issues
- Getting to a higher level of financial literacy in Australia
- What is the future of advice and how far off is superannuation 2.0?
- Investment and economic outlook, April 2024
- Australia’s debt service ratio ‘extraordinary’: CBA
- Connecting an adviser with your children
- ACCC scam report
- The Shortest-reigning Monarchs in History
- ATO warns trustees about increasing crypto scams
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
- The 2025 Financial Year Tax & Super Changes You Need to Know!
- Investment and economic outlook, March 2024
- The compounding benefits from reinvesting dividends
- Three things to consider when switching your super
- Oldest Buildings in the World.
- Illegal access nets $637 million
- Trustee decisions are at their own discretion: expert
- Regular reviews and safekeeping of documents vital: expert
- Latest stats back up research into SMSF longevity and returns: educator
- Investment and economic outlook, February 2024
- Planning financially for a career break
- Could your SMSF do with more diversification?
- Countries producing the most solar power by gigawatt hours
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- Quarterly reporting regime means communication now paramount: expert
- Plan now to take advantage of 5-year carry forward rule: expert
- Why investors are firmly focused on interest rates
- Super literacy low for cash-strapped
- Four timeless principles for investing success
- Investment and economic outlook, January 2024
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
October - December 2022 archive
- A 2022 Advent Calendar for our clients
- Volatility is here to stay
- Three things to consider when switching your super
- Making the most of your super limits
- SMSF professionals play critical role in Age Pension planning
- Positive results from research into the value of financial advice.
- Advisers warned on major timing traps with lifetime CGT cap
- Draft legislation released for franking credit changes
- Budget October 2022-23 - Comprehensive summary
- Federal Budget: all the key points you need to know
- Federal Budget 2022: Winners and Losers
- Federal Budget 2022/23 - Documents and Facts Sheets
- ATO raises ‘illegal early access’ concerns with small business owners
- Investors and recessions
- Rapid interest rate rises reveal global market frailties
- ASIC consulting on changes to SMSF advice guidance
- ATO taking ‘harsher’ stance on loans to members
- How costs can add up
- Take action on valuations now to avoid delays, says ATO
- Four powerful ways to build investing confidence
- ATO provides cyber security tips for SMSFs
- The advantages of investing early
- Partial property sales eligible for downsizer
- The Countries that Consume the Most Beer in the World