As an investor, your rate of return is only half of the equation. You also have to know how much you are paying in fees before you can really know how much money you are going to have in your account at the end of the day.
High fees—whether you are paying them on mutual funds or IRA accounts—can eat your portfolio alive if you aren’t careful. Of course, if you are paying higher fees for a superior return when compared to the general stock market indices, the fees may be worth it. However, if you are paying higher fees and you aren’t seeing higher returns, you need to reevaluate where you have your money.
[VIDEO] Improve Your Returns by Reducing Your Fees
The Effect of Higher Fees
High fees can devastate the rate of return you earn on the money in your portfolio. Unfortunately, most investors misunderstand the impact a few percentage points can make.
Typically, individual investors will look at a fee of 2 percent, and they will mistakenly believe that it is a small number. After all, 2 percent is only $0.02 out of every $1.00, right?
Well, what most investors forget is that the 2 percent fee is not charged on the profits earned in the portfolio, it is charged on the entire amount in the portfolio.
That means if you are paying a 2 percent fee, and you earn a gross rate of return of 8 percent, you actually only earn a net return of 6 percent—which equates to a 25-percent decrease (2 ÷ 8 = 25 percent).