By Theo Thimou, clarkhoward.com
Want to make more money over time in your investments? Then you’ve got to pay attention to this one key data point in your portfolio.
What you’re paying in annual fees is a big deal
A new study from BuyUpside.com shows that just a difference of 1% in annual fees can mean an $80,000 difference in retirement. Here’s how the math works.
Let’s say you invest $100,000 today with a 5% annual return and you pay 1% in annual fees. In 30 years, you would have $319,694.
Now let’s say you invest $100,000 today with a 5% annual return and you pay 2% in annual fees. In 30 years, you would have $196,439.
Paying what seems to be a measly 1% more in fees (2% instead of 1%) eats an $80,000 hole in your retirement plan! What seems inconsequential in the here and now actually has a huge effect on your future wealth.
The math in this chart is really compelling, courtesy of USA TODAY:
Meanwhile, here are some other investment pointers to keep in mind…
Start saving early
A 15-year-old who saves $2,000 each summer for seven years and lets the money grow in a retirement account until 65 can easily amass $1 million or more. That’s without ever contributing another penny after 21!
These numbers assume a 9.4% average gain annually, which sounds like a lot until you consider it’s the average return on the stock market since 1926—even accounting for all the ups and downs of the 1930s Great Depression, and all the bear markets of the modern era.
Of course, inflation will greatly eat away at the purchasing power of $1 million when a 15-year-old eventually retires, but the point is that it can be easy to build some level of comfort and security into later life if you’ll just start saving early!
Most people don’t start thinking about saving until they hit 40. Begin early and it can make a big difference down the road.
Invest equal amounts of money on a set schedule
By making regular contributions each month or each pay period in equal amounts, you are doing what’s called dollar cost averaging.
That’s just a fancy way of saying that you’re pacing your investing against the market. With the same dollars each month, you’re buying more shares when prices are low and fewer when they’re high.
Over time, putting money in this way — rather than all at once in big lump sums — reduces the possibility of panic in you and keeps you steady as you go. And being able to comfortably stay in the game makes you more money over the long haul.
Diversify your portfolio
Spreading your money out among both domestic and international investments is one of the safest ways to invest. Clark recommends mutual and index funds over individual stocks. Pick four or five mutual funds for your portfolio with at least one being an international fund.
When you’re younger, you want more stocks and fewer bonds in your portfolio so your money has the optimal time to grow. As you age, you can do the reverse with more bonds and fewer stocks.
Do discount investing
A couple of years ago, a financial columnist named Kathy Kristof reported on findings that the typical investor who makes an annual $4,000 contribution into an IRA can lose 54% in fees alone each year.
There are three fees most commonly associated with commissioned investments: The “load,” which is the commission itself; 12b-1fees, a dubious marketing charge that pays for advertising to attract more money to the fund; and an annual management fee, which you always want to be lower than .5 percent.
The takeaway here is simple: Don’t buy your investments through full-commission brokerage houses or an insurance agent. Instead, buy your investments commission-free (aka with “no load”) through discount brokers that hold down the other expenses too. Vanguard, Fidelity and T. Rowe Price all do a great job of this.