Why Low Costs Matter: Expense Ratios Explained
In investing, you get what you don't pay for. Every dollar in fees is a dollar that stops compounding for you.
What is an expense ratio?
It is the annual fee a fund charges, as a percent of your balance. A 0.05% fund costs $5 per year per $10,000. A 1% fund costs $100.
The compounding cost
Invest $10,000 a year for 30 years at a 7% gross return:
| Annual cost | Ending balance (approx.) |
|---|---|
| 0.04% | $940,000 |
| 0.50% | $870,000 |
| 1.00% | $800,000 |
| 2.00% (fund + advisor) | $690,000 |
Other costs to watch
- Advisory fees (often ~1% of assets)
- Sales loads and 12b-1 fees
- High-fee 401(k) plan options and annuity riders
- Taxes from frequent trading
Unlike returns, costs are certain and controllable. That makes them the easiest win in investing.
Not financial advice. This article is general education. Consider your own circumstances or consult a fee-only fiduciary.