How Actively Managed Mutual Funds Can Negatively Impact Your Portfolio
Actively managed investment funds typically involve a portfolio manager or team of managers who make decisions about which securities to buy and sell in an attempt to outperform a particular benchmark or index. Actively managed investment products often come with higher fees and expenses compared to passively managed investment funds, such as index funds, which aim to track the performance of a particular benchmark or index.
Actively Managed Funds Can Charge Higher Fees
One way in which these higher fees and expenses can negatively impact your portfolio is by eating into your returns. If the fees and expenses associated with an actively managed investment are high, it may be more difficult for the portfolio to outperform a benchmark or index, and you may end up with lower returns as a result. Every dollar you pay in fees is a dollar that is not being invested, and therefore missing out on the benefits of compound interest over time.
Actively Managed Funds Can Charge Commissions and Other Costs
Another way in which actively managed investment products with commissions and other costs can negatively impact your portfolio is by adding additional complexity and requiring more of your time and attention. For example, if you are managing multiple investments that each have different fees and expenses, you may need to spend more time tracking and understanding those costs in order to make informed decisions about your investments. Too often, investors lose track of the true costs of their investments or find it burdensome to sort it all out.
How Much Should You Pay in Investment Fees?
At One Day In July, we are fiduciary financial advisors who stress the importance of low fees in investing. A difference of just 1% in fees over an investment lifetime can add several years of work to retirement. A difference of 2.25% in fees over an investment lifetime can deplete two thirds of your retirement savings.
This hypothetical illustration doesn't represent any particular investment nor does it account for inflation. It assumes $50,000 is invested into an account that earns 7% a year for 50 years. The y-axis represents total portfolio value net of all fees, while the x-axis represents years assuming a 7% annual return, across three different annual fee rates. Calculations assume fee levels represents both the amount paid in expenses as well as the "opportunity costs" - the amount you lose because the costs you paid are no longer invested. There may be other material differences between investment products that must be considered prior to investing. Investing involves risks. Performance cannot be guaranteed.
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