When I was younger and first heard about investing I thought: “Wauw, this concept of my money working for money instead of me working for money is so smart that I’m probably not smart enough to do it”. But I considered myself smart enough to not just let anybody do it, so I went online and researched the different investment funds. After thorough googleling (wauw such skillz, huh?) I ended up picking a somewhat local fund based on past performance.
Was I as smart as I thought with this past performance research? The fund performed like its benchmark, but the costs made sure that I didn’t!
The truth is that getting higher returns than the general market is very hard and only a few people have done it consistently over a long period of time. And no, we are not saying that it can’t be done. In fact, you are probably thinking about someone like Warren Buffet right now to prove us wrong. But hey, would he really be as famous as he is if he just did what thousands of other people could do?
So what should the young me have looked for when I did not feel like handling my investments myself?
Costs and expenses
You can’t guess or estimate the returns that you will get, but you can choose how much of those returns you want to give to a fund manager. But the cost are only some small percentage isn’t it? Yes and no. Costs are usually only small percentages of your investment, but remember that average returns are also just small percentages – which compounds over time to large returns.
But how much does costs affect your investments? Let us answer that with a flow diagram.
In the above example all of the investment funds returns an average of 8% per year. Not even the guy with the beautiful mustachio and suit to the right returns more although his powerpoint says he usually does.
So the takeaway from this post is that you should be aware of how investment costs affect your future pile of gold. And remember that the portfolio managers in the expensive funds are not bad people. Investing in one of these funds are way better than doing nothing with your savings. We however stress that expenses are the only known factor in your investments so you should at a minimum give it a thought.