Investment Fees Could Actually Affect the Returns You Get
While it is a shrewd thing to invest, and consistently keep doing it, one item that might go unnoticed to investors is the fees incurred. Investment fees are essentially a negative return, which take away from your cumulative returns. This is not to mean that investors should not pay fees while investing nor investment firms should not charge their clients, NO. It basically means investors needs to be aware of the fees they pay to invest with a particular firm.
Some firms charge high fees, some modest fees while others charge considerably low fees. A case in point would be; your expected annual return on your investment is 11%, which two firms have pointed out as their gross rate of return;
Firm A has a cumulative fee of 3%, while firm B has 1.8%:
This means Firm A will give you the client an annual return of 8%, while Firm B will give you a percentage return of 9.2%. If these investments were to be held for five years, Firm A will result into less compounded gains compared to Firm B. Important to note is that the larger the capital invested the greater the disparity in returns will be.
Some fees are variable fees and others fixed. Exchange traded securities such as bonds and stocks incur fees such as broker fees which include commissions, swaps and spreads. These fees are charged regardless of whether you make a profit or loss. Commissions are a cost on a unit share of the position you hold. Spreads are designed to charge from the difference between the buy and ask price. The broker makes money by selling to you an instrument that it bought at a lower rate (buy price) at a higher price (ask price) and vice versa.
Further, there are fees that are known as Swaps. These fees are incurred when a position or investments are held for certain periods of time. For instance, some indices and currency trading brokers charge their clients for holding a position overnight or over the weekend. Swaps are often added on either commissions or spreads, which makes the fees even higher.
Some firms have fees referred to as Load fees. These are fees charged when an investor buys an asset or sells the same asset. The selling bit is synonymous to redemption fees that investment firms charge their clients upon liquidation of their assets.
Additionally, there are recurring fees which include performance fees, management fees and marketing costs (commonly known as the 12B-1 fee in the US). Other firms have the first investment installment you make as their fee. It all boils down to your investment goals and how want to achieve a predetermined amount of return.
To avoid huge hits on your returns, you can limit buy and selling often and settle on strategic and few times to execute your investment decisions. Better yet, you can opt for bulk orders rather than small ones, this gives you a wholesale type of advantage as is the case over retail buying or selling.
You should always strive to know which fees are charged on your investments as this will determine the amount of returns you get. You should also be careful to note that low fees do not necessarily mean better performance on the choice of investment you make. There is more to an investment firm or vehicle than fees such as integrity, performance track record, and regulatory compliance among many others. Therefore, strive to get a better understanding of what or who you choose to invest in or with respectively.
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