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RP: When you read about investing in the media, the focus is almost always in performance.
But there’s something more important you need to think about — and that’s the fees and charges you pay.
Here’s the financial analyst Louise Cooper.
LC: Fees are the most important thing that you need to think about when investing. Most people also invest for decades. If you think about it, you're investing for your children's education, or to buy a home, or for your pension – probably the most valuable asset you will ever have along with your home. That is a multi-decade investment, and what people don't understand is: returns compound, but so do fees. And so if you are paying a 1 or 2 percent fee, your pension could be half the size that it should be. This is the impact. It is absolutely massive. Fees and costs are everything.
RP: But despite the importance of fees and charges, it isn’t always easy for investors to work out the total cost they’re paying.
Why? For Louise Cooper, the answer is obvious.
LC: Costs are quite complicated, and it benefits the fund manager to hide those costs. So unsurprisingly, as investors, as consumers, we have no information – or very little information – about true costs. Costs have been hidden, still are hidden from investors; and that's because fees make so much money for the fund management industry. Huge amounts of money. If it's costing you, it's going to the fund manager. So unsurprisingly, it's very difficult to get information from fund managers about costs.
RP: Of course, performance isn't irrelevant. But what the industry doesn’t want you to know is that – over the long-term – only a tiny proportion of fund managers actually beat the market.
LC: The point about investment performance is like anything. It has a normal distribution. So, in any year, there will be some funds that outperform. Some of them on the right tail of that normal distribution; that do well. So what the fund management industry does is market the hell out of those few funds. Stupidly, investors then buy those funds... but because one year's performance is no guide to future performance, those top-performing funds one year become the bottom-performing funds for the next year. By which time they've got investors' money, investors don't bother to check. So that is why we have that ridiculous focus on investment performance – because it benefits the fund management industry.
RP: So, don’t be fooled by the obsession with performance. It’s a distraction from the factor that matters most, and that’s cost.
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