Fees and FIRE

So, you have decided to invest some of the money you have. Great stuff- you understand all the warnings (like, not day trading, using index trackers, investing for at least 5 years), and you are about to press the button. Wait, there are fees involved? Oh yes, read on to find out more about Fees and FIRE

Nothing is for free

If you haven’t heard this in life, consider yourself lucky (or not well lived??). Everything in this world costs something- now sometimes that isn’t an up front cost- like Facebook, or using Google for searches. If it’s not up front- then you are paying for it somewhere else (in this case, your data is used to advertise to you, and sell products/services etc). This is the case for investments as well- there are fees to be paid.

Is there a way to avoid paying fees?

The short answer is no, basically. As above- if you think the service is free- then you end up paying for it in another way. There are a couple of brokers out there that offer free trading services (like Trading212) which uses their other operations to subsidise their trading service (Their CFD service makes them the money)

So, is it still worth investing?

Yes, yes, and more yes. Just because you have to pay a small amount of fees- depending on what (& how) you invest- these fees should be a very small amount of the total return that you can hope to achieve. This is why I, and many others, suggest using passive index trackers– their fees are very small compared to active trackers- or “market beating” funds.

Why does this matter?

Well- simply put, the less than you pay in fees, the more of the return is given to you, rather than taken by the person/company that runs the fund that you have invested in. So, it might sound rather petty- but the difference between 0.2% and 0.3% sounds like a very small 0.1%? I mean, you are right, but let’s look at it another way- if you are only paying 0.2% to the fund, then if that changed to 0.3% then actually that’s 50% more!. Who in their right mind would pay 50% more for something? Even if the figures sound small (since we are talking parts of just 1%) they actually add up over time.

Let’s compare 2 example funds

These funds are identical- apart from that one has a fee of 0.2% and the other has 0.3%- a small difference right? For this example, I’m going to ignore all other fees- and I’m also going to assume that the fund itself doesn’t change value (just to make it simple as possible)

	Fund 1 (0.2% fee)	Fund 2 (0.3% fee)
Year 0	£1000	£1000
Year 1	£998	£997
Year 2	£996	£994.01
Year 3	£994.01	£991.03
Year 4	£992.02	£988.05
Year 5	£990.04	£985.09
Year 10	£980.18	£970.40
Year 20	£960.75	£941.68
Year 30	£941.71	£913.81

So- year 1, there is only a quid’s difference, barely anything right? Well, the difference in fees continues to compound- by year 10 instead of spending under £20 in fees, it’s nearly £30!. By year 30, you have lost nearly 9% of the original investment to fees (compared to under 6% of the lower fee fund)

Other charges also matter!

Fund fees matter- but the other charges also part a part as well. These are usually- transaction costs & platform costs. Usually transaction costs are very low, as long as it’s a large fund. So do double check this is low
The other charge is the platform fee. This fee enables the platform to operate (since the fund fees are given to the fund owner/operator)- the platform still needs money to operate. If you are just starting out/have a low balance- then it’s worth going for a percentage based provider- like Vanguard that charges 0.15%, or AJBell that charges 0.25%. If you have a larger portfolio then you should look into a fixed fee provider like iWeb.

Fees and FIRE – Conclusion

Investing is always worth it- especially when you look at the dire interest rates offered by banks. As long as you are invested across the market (index funds) and for at least 5 years- preferably 10 years+. Just be aware of the costs- and ensure you move broker if required to get yourself the best deal. Checking yearly is probably often enough- and if you are going to move broker, make sure you do an “in specie” transfer, otherwise market movements could destroy the fee saving (and more!)