They say you must spend money to make money. But the money you pay to invest has a big effect on what you have left in your own pocket.
Points to know
- All investments have costs.
- Money you lose to costs compounds (rises exponentially) over time.
- Because investments with higher costs must overcome these expenses, their performance tends to suffer vs. lower-cost investments.
Understand what you're paying
Every investment has a cost, even if you don't realize you're paying it. There are many different kinds of costs, but they all have one thing in common: If the money is going somewhere else, it's not going to you.
Why do costs matter?
Investment costs might not seem like a big deal, but they add up, compounding along with your investment returns. In other words, you don't just lose the tiny amount of fees you pay—you also lose all the growth that money might have had for years into the future. Imagine you have GHC 100,000 invested. If the account earned 6% a year for the next 25 years and had no costs or fees, you'd end up with about GHC 430,000.
If, on the other hand, you paid 2% a year in costs, after 25 years you'd only have about GHC 260,000. That’s right: The 2% you paid every year would wipe out almost 40% of your final account value. 2% doesn't sound so small anymore, does it?
What can you do to control your costs?
Because all investments have costs, it might seem like a waste of time to worry about them. Or maybe you assume that a higher price means higher quality. But nothing could be further from the truth. Research on mutual funds has shown that higher-cost funds generally underperform lower-cost funds. * That's because the fund managers charging these costs have a difficult time adding enough value to overcome the additional expense.
