Expert Advice

Why Are Fees So Important In Determining Investment Returns?

Mitch Tuchman, Managing Director of Rebalance, explains why fees are critical to investment performance.

Mitch Tuchman: Fees are critical to investment performance and there’s no better way to say it than how Charlie Ellis, one of our investment committee members says it: only 1%.

Most people don’t think that 1% means anything, but think about it like this, if stock markets all over the world grow by 9-10% a year, and bonds grow by 4-5% and you have a blended portfolio of some stocks and bonds that may grow at 7-8%, you’re going to make 7 or 8% a year over a long period of time. If you pay 1% of 7-8%, which are your profits, then you’re really not paying 1%, you’re paying 15 or 20% of all your profits.

Now I don’t know about you, but if I were in business with someone and they were helping me with something I wouldn’t want to pay them 15 or 20% of all my profits. I created the money that creates the investments. So that 1% is a very, very big part of this. Reducing fees is a critical part of what we do and a critical part of what people should be thinking about.

Unfortunately people don’t spend the time to analyze their fees and they also don’t know how to ask people who are helping them with investing, what their fees really are, but they’re critical.