Every fee that eats into your return
Visible order fees are just one part. Ongoing fund costs, account fees, foreign-currency markups, and the spread often matter more, because they apply constantly.
There are two kinds of costs. One-off costs when you buy and sell, and ongoing ones that act on your entire balance every year. The second kind is the more dangerous one.
One-off costs include the order fee, venue fee, spread, and, for some products, a front-end load. Ongoing costs include fund costs, account fees, and foreign-currency markups.
The difference is enormous. A five-euro order fee is five euros. One percent in ongoing costs on a €50,000 portfolio is €500 a year, and that sum grows right along with your wealth.
Over thirty years, one percentage point of ongoing costs can amount to roughly a quarter of your final wealth. That's why looking closely here pays off more than almost anything else.
Total cost burden is made up of product-related and account-related components. Product-related costs include ongoing charges, transaction costs inside the fund, and any performance fees. Account-related costs include custody fees, order fees, venue fees, and foreign-currency markups, the latter applying both on purchase and on every distribution.
Ongoing costs act multiplicatively on the balance. The final value is reduced approximately by the factor ((1+r−k)/(1+r))^n, from which the disproportionate long-term effect follows. At r equal to seven percent, k equal to one percent, and thirty years, the reduction in final wealth comes to roughly a quarter.
Undisclosed cost components are hard to capture. These include trading costs inside the fund that aren't part of the cost ratio, and tax effects from dividend withholding taxes, which vary by fund domicile and replication method. That's why the actual deviation from the index over several years is a more informative figure than any single stated cost number.
Summary
- Ongoing costs act on your entire, growing balance.
- One percentage point over thirty years costs roughly a quarter of the final value.
- The actual deviation from the index says more than the cost ratio alone.
Did you get it?
Which type of cost matters more in the long run?
Ongoing costs, since they act every year on the entire, growing balance.
Why is the cost ratio alone incomplete?
Because trading costs inside the fund and tax effects aren't included.
Where do foreign-currency markups apply?
On purchase and sale, as well as on every distribution paid in a foreign currency.
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