Don’t let your cash be eaten

Costs really do matter. Patrick Convey on how high charges can impact your investment returns. Ensure you are aware of the effect of investment fees on your own portfolios.

Human beings are poorly wired to be good investors. We have many deep-seated biases and behaviours that, while once useful to survive in the wild, do us a great disservice when investing.

One area of weakness is our poor grasp of the exponential impact of compounding that can work both for and against us. 

Imagine three different portfolios that deliver returns of one, three and five per cent per year after inflation – but before other costs – over a period of 30 years: £100,000 invested in each would result in a growth of purchasing power to around £135,000, £240,000 and £430,000 respectively. 

Seemingly small differences in the compound rates of return turn into large differences in terms of financial outcomes. That is one of the great positives of a disciplined and patient approach to investing – small returns turn into big numbers, given time. 

On the other side of the coin, costs, when compounded over time, eat away at these market returns to a far greater degree than many investors imagine.