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The fund industry and the media like to make investing seem exciting.
They typically focus on performance - the possibility of striking lucky and earning big returns.
In fact investors should be more concerned with a more mundane, but far more important issue — Cost.
The good news is that although you have no control over how your fund performs, you can control the fees and charges you pay.
Studies have shown that, over time, cost is the single biggest predictor of investment returns.
Yes, generally speaking, the more you pay to invest, the smaller your net returns will be.
Inevitably costs create a gap between the market return and what you as an investor actually receive. By reducing your costs, you can at least narrow that gap.
And don’t under-estimate the long-term difference that will make.
Because of the effects of compounding - charges after charges, year after year - it’s not uncommon for fees and charges to swallow up half an investor’s potential returns.
The best way to keep the cost down is to use index funds, which simply track an index at a fraction of the cost of actively managed funds.
And remember, every time you trade you incur expenses. So the less you chop and change your portfolio the better.
Controlling your costs is the third step to successful investing.
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