Why Cost Matters
What’s a reasonable fee to pay for an investment account? How much value do you place on certain features? What will you end up paying at the end of a year – or at the end of ten years? These are not easy questions to answer and can be overwhelming when researching different investment options.
Here are a few tips for understanding fees:
1. Cost is incredibly important.
The value of an investment is, ultimately, in the returns. You should be wary of any fund or manager that charges high fees (1% or more), because high costs will only eat into your returns. A study by Morningstar found that low-cost funds outperformed high-cost funds in every single time period and data point tested. It’s simple: keeping costs low is the smart way to invest.
2. What else are you paying for?
Not all accounts are created equal. Do your research and understand where else you might be paying fees. Are you being charged for trades or transfers? Do you have to pay another bank to wire money into your account? Are you being charged broker fees for rebalancing your account? According to a 2007 study cited by the WSJ, these additional fees would cost an investor around 0.66% (and in some cases, as much as 1.99%).
3. What do you get?
On the flip side, it’s important to understand what’s included for the price you are paying. Are you invested in a diversified portfolio? Are you getting custom advice? Is your account rebalanced for you, or do you have to remember to do it yourself? Can you link it to your checking and set up auto-deposit? Is it liquid – do you have access to your money when you need it?
This suite of services is included in your Betterment account and would cost ten times more at traditional investment firms. The easier it is to set up and go, the more likely you will do it (which is why we provide an end to end solution).
4. Is it easy?
In 2011, the average investor underperformed the fund they invested in by half (source: Dalbar). Investors are making mistakes like buying high and selling low, causing them to underperform the funds they invest in.
Perhaps the most important benefit of Betterment is that we make investing simple and accessible enough so that people will actually do it. Getting over the inertia and getting started can sometimes be the hardest part. We’ve created investor guard-rails so people stay on track.
Reacting to emotional biases or simply doing nothing can be the costliest mistakes of all.
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