The High Cost of 1%: Why Fees and Expenses Matter When Building Your Wealth

Don't let investment fees eat away your returns.

When it comes to investing, it's easy to get caught up in the excitement of potential returns and overlook the importance of costs. However, as the old adage goes, "a penny saved is a penny earned," and this couldn't be more true when it comes to investing.

To illustrate the impact of costs on investment returns, let's look at three different scenarios of a hypothetical investor who invested $10,000 per year for a total of 40 years in the S&P 500 ETF. In the first scenario, the investor chose an ETF with a 0.1% MER and earned an annual return of 7.96%. In the second scenario, the investor chose an ETF with a 1.1% MER and earned an annual return of 7.06%. In the third scenario, the investor chose an ETF with a 2.1% MER and earned an annual return of 6.16%.

Over the 40-year period, the investor with the 0.1% MER earned a total of $939,798 in returns, while the investor with the 1.1% MER earned $717,758. The investor with the 2.1% MER earned only $527,382. That's a difference of nearly $412,416 between the investor with the lowest costs and the investor with the highest costs.

While the impact of costs may not be immediately apparent, the long-term effects can be significant. The more you pay in fees and expenses, the less you have to compound and grow your wealth. On the other hand, the lower your costs, the more money you have working for you and the greater your potential returns.

Unfortunately, many big banks and financial advisors try to sell mutual funds with high MERs, often in the 1-2% range. These high fees can cost hundreds of thousands of dollars over a lifetime of investing. In fact, according to a study by the Consumer Federation of America, a mutual fund with a 1% MER that earns a 7% annual return will cost an investor $590,000 over a 50-year period, compared to $160,000 for a fund with a 0.25% MER earning the same return.

This is why it's so important to pay attention to the costs associated with your investments and do your due diligence when choosing where to invest your money. Whether it's the MER of an ETF, the expense ratio of a mutual fund, or the commissions and fees charged by a broker, all of these costs can add up and eat into your returns. By being mindful of these costs and choosing low-cost investment options, you can make sure that you are maximizing your returns and building your wealth over the long-term.

In conclusion, don't let the excitement of potential returns distract you from the importance of costs when it comes to investing. By paying attention to fees and expenses and choosing low-cost options, you can ensure that you are getting the best value for your money and maximizing your wealth-building potential.