Do you know how fees impact performance?

Lewis Jackson, from Morningstar Australia, looked at the long-term impact of fees on investment returns. He found that differences as small as 0.34%—or 0.0034—can equate to a huge amount over 30 years.
By Morningstar |  07-09-21 | 
 

While we are all aware that costs and fees have an impact, I sought to illustrate it clearly.

Annual Investment

I calculated the returns for five hypothetical portfolios, over a period of 30 years. Each portfolio started off with investing $10,000 a year. Over the next 30 years they each earn the same hypothetical return of 10%.

The portfolios were identical in every respect except that the annual fees range from 0.16% to 2%.

Predictably, large differences in fees create large differences in returns. The investor paying 2% in fees is $460,000 worse off than someone paying 0.16%.

But tiny differences are significant over the long span of three decades. The difference between 1% and 1.3% equates to an extra $74,000 in retirement; between 0.5% and 0.16%, $99,000.

IMPACT FEES 1

IMPACT FEES 2

Lumpsum Investment

It’s a similar story if I track a lump sum invested in the ASX 200, Australia's leading share market index comprising of the top 200 ASX listed companies.

Had my parents invested $10,000 in 1991, when I was born, I’d be looking at $175,000 at the end of 2020, assuming no fees.

Had they paid fees of 2%, I’d be down $75,000 to $100,000; a hefty 43% haircut.

The impact of fees is barely visible at first. The large divergence in outcome is only visible over decades.

IMPACT FEES 3

IMPACT FEES 4

When evaluating mutual funds, fees are one of many important metrics for investors to assess, including performance, size, liquidity and management.

Read the original article here.

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