Swap Your Advisor For An Algorithm To Save On Fees
Even simple retirement investments through your employer may come with numerous fees that eat into your returns. There may be fees for managing your personal investments, managing the fund in general, insurance fees in case you pass away and stop investing, as well as an assortment of other fees associated with your account, like loan fees for money you borrow from your retirement fund.
How “Little” Fees Add Up
- You could be losing tens of thousands of dollars to fees on your investments over the years. Let’s use an investment of $25,000 growing at seven percent per year as an example. Over 35 years, with a reasonable 0.5 percent in fees, that nest egg will become $227,000. However, if you bump the fee up by just a single percentage point, you’re only looking at $163,000—a loss of $64,000! That’s better than not investing anything at all, but it is a loss of money you earned, and a bigger chunk of that money should (and could) stay in your account.
- If you follow the old chestnut “buy low, sell high”, you’re paying fees with every sale. As it turns out, only the first part of that advice is worth following. Buy your investments low and hold them. The trick, if it can be called that, is to pick investments you believe will be fine for the long term. This is why so many investors like index funds. Historically speaking, the whole market outperforms individual stocks over a long timeline, which is the advantage that index funds leverage.
What’s A Reasonable Fee?
You never want to pay more than one percent in fees, expenses, or other costs related to your 401(k), especially if you’re getting the 401(k) through your employer. After all, large companies can use their size to negotiate a better deal with the firm managing your retirement.
Even if you own or work for a small business, you should be able to invest without high fees. Index funds and mutual funds pegged to indexes are cheap, simply because the money managers don’t have to do much to manage them. For example, Schwab’s S&P 500 index fund costs a whopping 90 cents for every $1,000 invested. Plus, index funds and well-diversified exchange-traded funds are one of the safest bets going. If you’re particularly risk averse (or even if you’re not), index funds can be a good way to start investing for retirement.
Years ago, investors had to seek out a good financial advisor and invest enough money to make it worth the advisor’s while (an unaffordable option for many), but this is no longer necessary. These days, software can provide some of those services for a much lower fee. Instead of an advisor, all you need is an algorithm with a track record of making sound investments based on widely-recognized principles of investment theory. Such algorithms will sell when it makes sense statistically, taking fees and taxes into account. They’ll also reinvest the proceeds in the most tax- and fee-advantaged manner possible.
Thanks to technology, now you can stop paying someone else, and start paying yourself.