What effect does compounding fees have on your investment

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by Site Author

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15 Mar, 2021

Over a 40 year period, an investor will have almost 50% more money for every 1% they can save in fees.

 

The fees that are charged on your investments are more transparent than they used to be. You can simply ask your investment provider to supply you with an Effective Annual Cost (EAC) which will break down the fees that you’re paying as well as where they are going to (Investment management, administration, advice fees). The longer the term of your investment, the greater the impact these fees will have on its performance. Considering the term of most retirement annuities, it is best to keep a close eye on the fees you are paying over the period.

While 1%, 2% or 3% might not seem like much now, the compounding effect that these fees have over a 20, 30 or 40 year term can be huge. To give an example of this effect is the below graph which assumes R100 000 is invested for a period of 40 years and has a return/growth of 8% per annum. If there are no fees, our investment will grow to around R2.15 million.

When we start paying the fees, we can see the impact it has on our investment:

  • 0.5% fees, our investment will be around R1.8 million
  • 1% fees, our investment will be around R1.5 million
  • 2% fees, our investment will be around R1 million
  • 3% fees, our investment will be around R700 000

 

The value of R100 000 invested over 40 years earning 8% interest annually

 

Make sure your investment isn’t being eaten away by the fees you’re paying. Its definitely worth getting a professional in to look at the fees and see if they cant reduce them going forward by placing you in a better investment/portfolio to cater for your needs.

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