You may be thinking that you are making good returns on your investments. You are possibly getting robbed too! While robbery may sound like an exaggeration, how about “losing or deprived of gains that you are otherwise entitled to?”. Who exactly is taking away your gains? It is your broker who is selling regular plan mutual fund investment. There are many these days: agents, banks, broker, online app or website.
1. You are Left with a Smaller Share of Gains
It is a deprivation because you are possibly left with a smaller share of the gains your investment capital makes after inflation and taxes. The reason is the % gains you are left with after inflation and taxes is quite small. Possibly 1.5 to 2% of your capital. And if you are paying 1% to the agent/broker/app/website then what are you left with?
When you consider the impact of this cut, over the duration of your investments it is appalling. You will probably lose up to 40% of your entire wealth. That is because these 1.25% to 1.5% commissions compound every year. The net damage will be 40% or even 50% over the course, of say 20 years
2. Compounding Reduces your Gains further
I recently read about Terrance Smith, an acclaimed investor in the UK, that
If you’d invested $1,000 with Warren Buffett in 1965; it would currently become a nest egg of $4.3 million. However, if Berkshire had been a hedge fund charging 2 & 20 (2% annual fees and 20% share in profit), that $4.3 million would have accrued $300k to the you with a stunning $4m to the manager
– Terry Smith in 2010
3. Percentage Share of Portfolio has to be Fair
Any percentage share has to be fair and not one-sided. Today’s commissions in equity mutual funds of 1% to 1.5% are quite high and not sustainable. Consider these analogies:
- Will you let your accountant charge you 20% of your net income for filling out your tax return?
- Will you let your doctor take a % share of the cost of your medical treatment?
Then why are you doing this to the hard-earned money that you invest?
You must question the true value you are getting out of the commissions you are paying.