Why do fees matter in investing?

Investment fees can significantly impact your returns over time due to their compounding effect. Brad Barrett highlights several reasons why fees matter:

1. Compounding Effect: Fees compound negatively, just like returns compound positively. Over long periods, even small fees can drastically reduce the final investment value. For example, a 1% fee versus a lower fee can result in a difference of millions of dollars over decades due to compounding 1.

2. Expense Ratios: Investment options like index funds often have low expense ratios, such as VTSAX with a 0.04% fee, significantly lower than the typical 1-2% fees of actively managed funds. This difference can make a substantial impact on net returns, reducing the final portfolio by 30-50% over a long investing lifetime 2.

3. Total Costs: Fees can include not only the fund's expense ratio but also fees paid to financial advisors. Combined, these can exceed 2% or more, which further erodes investment returns. Understanding and minimizing these fees is crucial to preserving your capital and maximizing growth 3.

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     1

     The Cost of Fees

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     2

     Fee Impact on Investments

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     3

     The Cost of Fees

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     4

     Index Funds vs. Hedge Funds

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4. Performance vs. Fees: Studies and real-world examples, like Warren Buffett's bet against hedge funds, show that low-cost index funds often outperform higher-cost actively managed funds, particularly after accounting for fees. Buffet demonstrated that the S&P 500 outperformed a selection of hedge funds over a decade, emphasizing the detriment fees can have on returns 4.

Understanding and managing fees is essential to maximizing your investment returns and achieving long-term financial goals.