From Here to Financial Happiness

Day Fifty Nine Reducing Drag

Dazzled by the prospect of big gains, investors often give far too little thought to investment costs. But if we aren't careful, we could find ourselves paying annual costs equal to 2% of our portfolio's value, and perhaps much more. We could hit that 2% if we buy high‐expense mutual funds, purchase insurance products positioned as investments, trade too much, or hire a broker or financial advisor who steers us toward higher‐cost products.

Admittedly, paying 2% of our portfolio's value each year might not sound so bad – which is why Wall Street likes to frame investment costs that way. But that 2% could be devouring a huge chunk of each year's potential investment return. Let's say the stock market returns 6% a year. If we pay 2% in investment costs, our net return will be 4%. That means a third of our potential return disappeared into Wall Street's pocket.

Your task for today: Figure out what you pay to invest.

Given the importance of keeping investment costs to a minimum, this is much harder than it ought to be. With some investments, like a savings account, certificate of deposit, fixed annuity, or cash‐value life insurance, there's no stated expense ratio. That doesn't mean these products are cheap. In particular, almost all investments that are sold by insurance companies pay high commissions to the salespeople involved and effectively levy high ongoing costs. But this, alas, isn't clearly disclosed to investors – and it may not be disclosed ...