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Pay Attention To The Expense(s) Of Investment Product(s)

Updated: Sep 27, 2022

Over the past twelve months or so, we have met a number of prospective clients all sharing the same confused refrain. Something to the effect that their investment portfolio has not participated in the current 9+ year bull market and they don't know why. There are more than a few reasons for a portfolio's lack of growth or underperformance of the stock market itself, but one glaring issue that never goes out of style is FEES. Especially when it comes to "investment products."

To drive home the point that unnecessary fees will destroy your returns, I took a look at a review I read in Barrons a few months back. They compare a basic S&P 500 Index ETF from a low cost provider and the same ETF from a much higher cost operation. Before we go further, why in the world does a high fee ETF that invests in the S&P 500 Index even exist! What a joke! I digress...

In any case, the low cost ETF charges .04%, while the high cost ETF charges 2.33% annually. The high cost ETF includes management fees, sales commissions, and "other costs." Who knows what the hell those are! What I do know is the result of nearly 2.3% in additional annual fees over the past 13 calendar years on a $100,000 investment, is more than $66,000 less in your portfolio.

To drive home the point... this asinine ETF has produced an $86,000 gain to the investor, while providing just over $40,000 in fees to the firm. In essence, for every $2 they made you, they made themselves $1. This is absurd for a hedge fund that invests to outperform the market, let alone an index ETF that is meant to mimic the stock market.

For whatever reason, these outrageously expensive products exist out there. We always say, half the battle of investment success is minimizing your expenses. Therefore, you have to be vigilant when investing in managed products, even basic index funds and know what you are paying!

Don't just assume you are "invested in the market" therefore you are getting stock market returns. Because you are going to wake up many years later wondering "what happened"... citing the same confused refrain we've been hearing a lot lately.


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