What Are Investment Fees Really Costing You?

investment feesI’ve been thinking a lot about the investment fees I pay both in my retirement account as well as my taxable brokerage account. I put together a spreadsheet to illustrate the differences between investments with varying fee structures to help myself out and I’d like to share the results.

I first discuss the results from comparing the fees that could be paid in a retirement account investing in mutual funds. Then I look at the fees that might be paid in a taxable brokerage account where I’m purchasing stocks and compare this to the alternative of investing in an ETF instead.

The Retirement Account

My first example considers the difference in fees between a retirement investment with a 1.0% expense ratio and one with a 0.25% expense ratio. For these scenarios, I assume a 6% annual investment return, and monthly deposits of $500 with an initial balance of $0. Account A is a mutual fund with an annual expense ratio of 1.0% and Account B is a mutual fund with an expense ratio of 0.25%. For purposes of this calculation, I assume fees are deducted monthly. Here are the results showing accumulated account balances and total fees paid after 10 years and 20 years of investing:

Ten Years

Twenty Years

Accum. Value

Fees Paid

Accum. Value

Fees Paid

Account A (1.0%)

$77,400

$3,600

$202,800

$17,100

Account B (0.25%)

$80,500

$900

$221,200

$4,500

The differences are substantial. In the 20 year case, the difference in accumulated values could easily be one-quarter to one-half of a year’s retirement expenses.

So this just helps to quantify what we already know, which is to choose the lowest fees you can when it comes to mutual funds. But I think what is surprising is that the fees can be substantial even if you keep the expense ratio at the 1% “rule of thumb”. One thing some savers may fail to realize when they are in the early years of building up their retirement account is that the fees you pay will grow substantially as your retirement savings grow. Remember that these fees are a percentage of your account balance, so they grow over time along with your account balance. For example, in the 15th year fees in Account A are close to $100 per month. In Account B they are around $28 per month.

This illustrates why choosing the funds with the lowest fees are so important. You want to keep as much of your own money working for you as possible.

Purchasing Individual Dividend Paying Stocks

The other fee scenario that I have been pondering recently is the comparison between building a portfolio in my taxable account through either low-cost ETFs or buying individual dividend paying stocks. Right now, in all honesty, I do both. But which would be the more cost effective choice? Is there a way to determine this?

Currently, when I buy shares of a stock I’m charged a $7 fee in my Vanguard brokerage account. I know I could probably get $5 trades at another broker and even create free drip accounts (commission free) through services like Computershare and Loyal3*. And maybe I should just bite the bullet and do that but I like having all my investments in one place not at several different places since, quite honestly, my finances are complicated enough as it is. But I would love to hear your thoughts on alternatives for me in the comments below.

OK, so I’ll try to make a comparison between building a portfolio through ETF purchases and individual stock purchases. Here are my assumptions: Account A will consist of individual stock purchases with a brokerage fee of $7 per trade (purchase or sale). Account B will consist of ETF purchases of a low-cost index fund with an annual expense ratio of 0.10% (the current expense ratio for VIG, Vanguard’s Dividend Appreciation ETF). I’m going to again assume a 6% annual investment return and I’ll start funding the account with $500 in purchases each month. I’ll continue making $500 purchases each month for 120 months (10 years) then I’ll let the account sit for 10 years making no purchases and no withdrawals, just accumulate investment gains. Then starting in the 21st year I’ll make 10 annual withdrawals equal to 4% of the portfolio balance.

This sounds fun, doesn’t it? Well, I like working with spreadsheets, so please don’t judge.

Here are the results.

Total Fees

10 Years

20 Years

30 Years

Account A (stocks)

$840

$840

$900

Account B (ETF)

$370

$1,470

$3,000

For the first 10 years, the fees are higher in Account A because I’m being charged that commission fee every month which is much higher than the fee through the expense ratio since the account balance is still pretty small. Then for the next 10 years, I’m not paying any fees in Account A, but the expense fees continue in Account B. For the final 10 years, I’m only making one transaction a year in Account A, so there are 12 more transaction fees.

If I were to make the $500 purchases every month for 20 years, then make annual withdrawals of 4% for the final 10 years the fee schedule would look like this:

Total Fees

10 Years

20 Years

30 Years

Account A (stocks)

$840

$1,680

$1,750

Account B (ETF)

$370

$1,840

$4,240

Clearly, this is a very simplified example. One consideration is that with the ETF I’m gaining instant diversification through choosing a broad index fund. It would be more difficult to achieve diversification in Account A though it could be done by purchasing 20 or so stocks spread across the market sectors.

This brings up another point, which is ease of use. In Account B, I’m choosing an index fund and I don’t have to think much about it beyond that. In Account A where I am picking individual stocks I need to do my homework before deciding to invest. So certainly the win for ease of use goes to Account B.

It’s also important to remember that I’m reinvesting dividends in both accounts. For Account A this means that I get the benefit of making additional systematic purchases without paying a commission fee.

From a fee perspective, I think the case can be made for the individual stock purchases, certainly more so if I take advantage of commission free Loyal3. I’m glad for this since I like creating my own portfolio of dividend paying stocks. I’ll continue to invest in index ETFs though because I like how they allow me to gain instant and broad access to entire sectors where I don’t feel as comfortable with my own stock analysis, such as utilities and financials.

What does it all mean?

These results help to give a comparison of the magnitude of fees that might be paid in retirement accounts with funds that have different expense ratios. Most investors consider a 1.0% expense ratio to be low already, but Vanguard has many funds with expense ratios at or below 0.25%. As far as my retirement account is concerned, I feel as though I’ve gotten the fees that I’m paying to the lowest level I can, as I’m invested entirely in Vanguard index funds. And of course, with an employer provided plan you are at the mercy of the plan provider that your employer chooses. So you might  not have as much choice when it comes to funds to invest in.

I’ll continue building my dividend stock portfolio and will look into making investments through Loyal3 where I can (they offer the ability to purchase about 55 different equities right now). I feel like I can be doing a better job at reducing the fees that I’m paying in my taxable brokerage account and this will be a goal of mine.

Have you given much thought to investment fees? What changes could you make to reduce the fees you are paying?

*I’ve recently created an account with Loyal3. I should be able to transfer the stocks I purchase into my brokerage account and I am going to give that a try. If this works, it will be a much more cost effective way for me to build my stock portfolio. For a nice overview of Loyal3, see Write Your Own Reality’s post on it here.

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17 Responses to What Are Investment Fees Really Costing You?

  1. Investment expenses can have such a detrimental effect on returns over the long haul. I like your illustration comparing both individual selections to an ETF, as that is one benefit to building your own personal dividend income fund.

    Appreciate the link as well!

    • Green Money Stream says:

      I had fun writing this because I was attempting to quantify the difference between paying for the ETFs or the individual stock picks. At $7 a transaction, it does add up. But then, since I have a buy and hold strategy, I am not paying anything to hold that security where I am paying a small amount for the entire time I’m holding the ETF. I think the analysis shows that certainly a case can be made for the individual stock purchases.

      I appreciated your review of Loyal3! You convinced me to give it a try!

  2. SavvyJames says:

    Through our various exchanges, you know that I often harp on fees and bemoan the fact that too many investors do not pay close enough attention and REALLY understand the long-term impact. Your tables provide a great illustration of the issue. Nice!

    • Green Money Stream says:

      Agreed. I don’t think people pay enough attention to fees. This analysis shows that even the 1% expense ratio funds can cost a significant amount. It’s important to be aware of that and I’ve done my best to reduce the fees I’m paying, but continue to look for ways to improve in this area.

  3. I haven’t looked at the fees I’m paying that closely. I spend most of my free time working on my side hustles in an attempt to increase my income. It looks like it might be worth my while to look at how much I’m paying in fees – it can make a big difference long-term.

    • Green Money Stream says:

      It’s definitely a good idea to look more closely at those fees. It could be an easy way to hold onto some more of your own money!

  4. Its amazing how much a small difference in fees can add up over time. They can make all the difference when you’re talking about many years out. I do like to hold a few individual stocks, but not in very large positions. I prefer funds for my larger holdings because they offer cheap diversification. The good thing is there seems to be a war between fund companies over who can charge the lowest fees on ETFs, and they keep dropping. Looks like investors will win that one! Nice overview of this really important issue.

    • Green Money Stream says:

      It’s really important to pay attention to fees, no matter what your investing strategy is. It’s great that there has been more focus on fees which is causing some funds to lower theirs. Also, with the introduction of ETFs into 401Ks, the fees will continue to drop.

  5. Great post, Kay! I especially liked seeing the comparison between the ETF and individual stocks. I’m also using the buy and hold strategy, so these spreadsheets gave me a lot to think about.

    • Green Money Stream says:

      I’m glad you liked it. I was really looking for a simple way to compare the costs associated with buying individual stocks and ETFs. Making the spreadsheet helped me to get a better understanding of how the fees would look.

  6. A lot of people don’t pay attention to the fees, but fees matter. They matter a lot, which is why I stick with Vanguard index funds. I don’t really buy too many individual stocks. I think Vanguard offers no fee trading for certain ETFs.

    • Green Money Stream says:

      Vanguard funds are great. I’m lucky to have them available in my 401K plan and I purchase the ETFs in my taxable account. There are no brokerage fees for Vanguard ETFs which make them even more attractive.

  7. Excellent Read Kay! People spend wayyyy too much on fees because they don’t care to or take the time to do the 10 minutes of research that would literally save them tens of thousands of dollars. If you’ve got a 40 year investment horizon, you don’t need a target date fund, you could save the fees and likely get a better overall return (albeit with more risk) in an S&P 500 index. And when they’re figuring out your wealth and how to grow it, spreadsheets are for ballers.

    • Green Money Stream says:

      Thanks Ryan! I do like creating spreadsheets for my finances so this was kind of fun. But yes, my hope is that everyone will take some time to look into what the expense ratios are in their own funds. Making a few simple changes can really pay off with some substantial savings in the future.

  8. The Caveman says:

    Great article! I’ve actually heard it described before that the best way to determine future performance of an investment is by comparing the fees.

    This is why I typically stick to ETFs and Index Funds. I’m not completely against mutual funds, but study after study has proven the importance of keeping the fees low. This is why I hate that most 401k plans only offer mutual funds as investments – can’t stand watching my returns each year having a bite taken out of them by fees!

    • Green Money Stream says:

      It’s not good if you don’t have access to low cost index funds in a 401K. I do think more employers are offering them though as there is more attention paid to fees.

  9. Pingback: Avoid High Fees | RetirementSavvy

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