YOUR PORTFOLIO’S growth might be dented by taxes, a market downturn or your own need for spending money. But there’s another potentially large subtraction: investment costs.
To be sure, investment costs often don’t appear that significant. But their impact is magnified over time, as the small annual subtraction slows the process of compounding. Let’s say you are choosing between two stock mutual funds, one charging 0.5% and the other charging 1%. If both funds match the market’s 6% annual return before costs, their after-cost annual return would be 5.5% and 5% a year. Over 40 years, the less expensive fund would turn $10,000 into $85,133, versus $70,400 for the more costly fund. What if you didn’t incur any costs at all, and simply collected the market’s 6% return? You would have $102,857.
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