Visualizing the destructive effect of fees on investments
June 10, 2018
Fees can turn a great investment into a mediocre one. They do so without us ever noticing, and after years, they can end up taking a significant portion if not the majority of your returns.
The goal of this calculator is to visualize the impact of fees. In particular, it helps us realize that the ever so incredible compounding effect also applies to fees. If you invest over 30 years at a 3% rate and pay $1 000 of fees the first year, that’s actually $2 427 over 30 years. And that’s just the fees of the first year.
The instant takeways are:
Fees seem to increase with time
If you take a long enough timeframe, you’ll notice that the fees can be higher than your returns.
This effect is so powerful that with a 4% return rate and 1.5% of fees, after 30 years, the bank made more money than you did.
Chose low-cost investments
If you play a bit with the calculator, you’ll most likely conclude that for most people, searching for safer investments with lower returns and lower fees is the best strategy. On a related note, I would suggest looking into Warren Buffet’s bet proving low-cost ETFs are better than alternatives.