What are the costs of investing?

When you’re planning your investments it’s important to always keep costs in mind as they can have a detrimental effect on your returns and your ability to achieve your investment goals.

Investing in shares

Every time you buy or sell shares you will pay a brokerage fee, for example $10.00 for trades up to $1,000 on CommSec.

The more you invest, the smaller the brokerage fee as a percentage of your investment.

For example, if you buy $1,000 worth of shares in a company and sell them a year later, you would’ve paid $20 in brokerage fees ($10.00 to buy + $10.00 to sell), representing 2% of your initial investment.

So you’d need to make a total return through capital gains (the increase in the market value of the shares) and dividends of over 2% to make a real profit. But if you invest $10,000 in a company, then the brokerage fees only represent 0.39%.

Frequent trading can also significantly increase your costs, but the longer you stay invested, the less the brokerage fees represent as a proportion of your annual returns.

Investing in funds

Investment funds pool together the money of multiple investors and deploy it in a range of assets.

The companies that manage these funds, known as fund managers, can charge a variety of different fees to investors so it’s important to take them into consideration if you choose to invest in a fund.

For example, if a 30 year old invested $10,000 in a fund with an annual management charge (often known as a management expense ratio, or MER) of 0.5% and it grew by 8% a year for 30 years, they would get a pre-tax return of $87,500 at the age of 60.

But if they invested in a fund with an MER of 2%, that return would fall to around $57,400.

There can also be additional fees that you may be unaware of, including trading costs, foreign exchange costs or stamp duty.

Costs are only one part of the equation and investment performance will always be extremely important.

Some funds are cheaper than others and some funds perform better than others over a long period of time so it’s important to look for a balance if selecting an investment fund.

Exchange traded funds are relatively low cost funds, that aim to match the performance of a share market index or other group of assets, rather than beat it.