Investment Fees: How A 1% Hit Can Be Worth More Than Half of Your Portfolio

by Louis Basenese, Advisory Panelist
Thursday, February 15, 2007: Issue # 641

With so many discount brokers and cost-conscious investments out there (like no-load funds and ETFs), we’ve been lulled into believing that we no longer have to worry about excessive investment fees eating up our returns.

Just recently, my uncle was bragging about how happy he was with the “reasonable” 1% he’s charged on his investments. I mean, can 1% really be considered excessive? If someone were willing to pay you a 1% return, “excessive” would be the last word you’d choose to describe the arrangement.

But it’s not the fees themselves that hurt – it’s the loss of the compounded value of those fees

Without fees, a $100,000 portfolio earning 10% a year grows to $11.7 million after 50 years. Add in a 1% fee, and your ending value quickly shrinks by $4.6 million. (Only $794,000 of that difference is actually fees. The rest comes from the lost gains associated with those fees compounded over time.)

Long story short: Even “reasonable” fees can cost us dearly.

How To Reduce Your Investment Fees

We all know we can’t invest for free. But we can take steps to reduce our expenses. How? Trade as little as possible. Doing so, according to Vanguard founder John Bogle, can shave half a percentage point off your expenses.

This is certainly easier said than done, considering we’re all hardwired for some churn. But here are two recommendations we’re convinced will help

First, always use trailing stops. Doing so will ensure the markets, not impatience, dictate exit points. Plus, it’s an easy way to maximize your holding period, let your winners run – and postpone and reduce costly fees.

The second thing to do is consider loading up on investments that you’ll likely never have to unload. Doing so effectively cuts your trading costs in half. And yes, these stocks do exist.

Fight Investing Fees with Trees

Take, for instance, Rayonier (NYSE: RYN) – one of the country’s largest timberland owners. The reasons it’s such a rare buy-and-hold investment are straightforward.

First, you get a Treasury-like yield of 4.2%. And although it’s not backed by the full faith and credit of the U.S. government, you don’t need that reassurance with this company.

Instead, there’s safety in the fact that timber has had just three down years since 1960. Stocks, on the other hand (as represented by the S&P 500), have had 11.

On top of a reliable income stream, you also get steady appreciation. Timber has outperformed stocks by a 4% margin for roughly 30 years. Rayonier has fared even better, outperforming the S&P 500 by more than double that amount in the past decade.

Lastly, timber investments have very little correlation with stocks, making them a great diversifier. And since Rayonier owns more than 2 million prime acres, there’s no easier way to gain instant exposure.

In short, seemingly low fees can take a serious toll on your investment portfolio’s long-term performance. Use a 25% trailing stop to guide – and reduce the number of – your trades. And look for high-quality stocks you can hold for years.

Good investing,

Louis Basenese

Today’s Investment U Crib Sheet

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