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Controlling Investment Costs

Drew Harper, CFA, CFP®
September 6, 2018

On a daily basis, individuals are inundated with information which can be overwhelming and cause anxiety.  Many wise people have said before, “Focus on what you can control.” Yet, almost everyone attempts to manipulate and emphasize issues that they have no control over.  These include worrying about what will be the best performing sector in the US market, if the dollar continues its precipitous rise against most world currencies and, most importantly, if the Denver Broncos will earn a trip to the post-season.

All joking aside, investors would be better served if they focused on what they can control - especially investment costs.

For most products and services in the marketplace, there is a direct link between the cost and value received.  Unfortunately, this relationship doesn’t always exist in financial services.  Therefore, investors must thoroughly evaluate and understand the cost of a service in context of the value added.  As wealth managers, we hire outside investment firms to manage our clients’ assets.  A key part of our search and evaluation process of financial products is to find the highest value at the lowest cost.

In order to illustrate the effect of fees, let's assume two hypothetical portfolios beginning with a value of $100,000. Portfolio A has an annual cost of 1.30% and Portfolio B has an annual cost of 1.80%.  The assumed return is 6% per year for 30 years.  The additional, seemingly small fee on Portfolio B of 0.50% reduced the ending value by over 15% compared to Portfolio A!

For illustrative purposes only.

The concept of compound interest not only encourages investors to save early and often, but it also reduces the cost of investing.  As evidenced by the chart above, compound interest can be just as helpful as it is detrimental to portfolio growth; make sure you’re on the correct side of compounding costs.

What matters most is the amount investors keep which helps them reach their goals and sustain their lifestyles. Therefore, don’t ignore your investment costs and remember it’s one of the few things you can control.

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Any opinions are those of Drew Harper and not necessarily those of Raymond James. Investing involves risk and investors may incur a profit or a loss. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

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