How to control your investing costs

Discover why the fund industry typically focuses on performance

Controlling your costs is the number one way to get better returns. The fund industry and the media love to make investing look exciting, dangling the prospect of striking lucky and earning big returns. But the factor that most reliably shapes your long-term wealth is far more mundane, and almost entirely within your control: cost.

In this video, the third in the Six Steps to Successful Investing series, you'll learn why controlling your investing costs matters so much. You have no say over how your fund performs, but you can control the fees and charges you pay. And studies have shown that, over time, cost is the single biggest predictor of investment returns. Generally speaking, the more you pay to invest, the smaller your net returns will be. Costs create a gap between the market return and what you actually receive, and reducing them narrows that gap.

The long-term difference is bigger than most people realise. Because of compounding, with charges stacking on charges year after year, it is not uncommon for fees to swallow up as much as half of an investor's potential returns. The most effective way to keep costs down is to use low-cost index funds, which track an index at a fraction of the cost of actively managed funds. Trading less helps too, because every time you buy or sell you incur expenses, so the less you chop and change your portfolio, the better.

The takeaway: controlling your costs is the third step to successful investing. It is one of the few levers in investing you can genuinely pull, and over a lifetime it can make an enormous difference to the wealth you build.

Chapters / Key points

• Why the fund industry and media focus on performance, not cost
• Why cost is the single biggest predictor of investment returns
• How fees create a gap between market returns and what you receive
• The long-term impact of compounding charges year after year
• How fees can swallow up half an investor's potential returns
• Why low-cost index funds are the best way to keep costs down
• Why trading less helps protect your returns

Transcript

Six steps to successful investing #3: Control your costs

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 underestimate 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.