Picking sharemarket investments that will make you rich is always a challenge, and no matter how much research you do, there’s never any guarantee that you’ve found a share that will eventually make you a millionaire.
But there’s one thing you can do that virtually ensures that you’ll end up with a ton of extra money by the time you retire: Minimise the amount you spend on management fees, commission costs, and other fees that you’ll run into throughout your investing career.
You vs. them
Unfortunately, the entire investing process has become a struggle to defend your hard-earned money from those who would take it away from you.
If you invest in individual shares, then you have to make sure that your company isn’t overcompensating its executives — often despite giving shareholders mediocre returns at best.
Recent research from the Australian Council of Superannuation Investors found top 100 chief executive pay is outstripping shareholder returns by more than three times.
Telstra Corporation Limited (ASX: TLS) CEO David Thodey’s total remuneration package jumped 60% to $5.1m. Former BHP Billiton Limited (ASX: BHP) chairman Don Argus recently told investors if they don’t like the massive salary packages executives earn, they can sell the shares. Charming, isn’t it? Mr Argus left BHP after 13 years service with a $3.1 million payout. Nice work if you can get it.
Keep your eye on your broker
Moreover, individual sharemarket investors also have to keep their eyes on their brokers. Full-service brokers can charge huge commissions just for ordinary share trades, while even online brokers sometimes have complicated fee schedules that impose a host of add-on charges ranging from high-activity fees to lack-of-activity fees, as well as charges for mergers and other corporate actions.
If you think you’ll avoid these problems by investing in funds, think again. Not only do you indirectly bear the costs of the individual securities these funds invest in, you also have an extra layer of expenses. It’s those expenses that are easiest to avoid — and doing so will make your final nest egg a whole lot bigger.
Save big money
It’s easy to underestimate just how much money you waste when you buy a fund with sky-high fees. After all, a percentage point or two doesn’t usually make much difference in the short run, especially during good times when you earn double-digit returns year in and year out.
But over time, those little percentage points add up. Some funds have expense ratios of 3% or more in categories ranging from megacap blue chips to mid- and small-cap stocks — and often these funds don’t come close to matching the return of the ASX/S&P 200 index.
By contrast, you can find low-cost that simply track the returns of the index. The Vanguard Index Australian Shares Fund (ASX: VAS) tracks the S&P/ASX 300 index, investing in around the largest 300 Australian companies and property trusts listed on the Australian Securities Exchange (ASX). Management costs up to the first $50,000 are 0.75%, falling to 0.50% on the next $50,000 and to 0.35% on the balance over $100,000.
And when you consider the positive impact of saving 3% each year over the course of your investing career, you’ll like what you see. The $3,000 extra you’ll save with a $100,000 account by using lower-cost alternatives adds up to $209,200 more in your nest egg after 30 years — and that’s assuming just a modest 5% return on your investments.
Keep your money
There’s nothing that compares to the rush of finding a share that produces gargantuan returns over the long haul, and just one find of that size can make or break your retirement.
But even if you never find such a stock, what you can do is put a lid on how much money you lose to investing costs. The money you save will mean a lot more in your pocket over the long haul.
The Motley Fool‘s purpose is to educate, amuse and enrich investors. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available.
This article authorised by Bruce Jackson.