This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Watch Your Fees

NEW YORK (TheStreet) --One truth that is too often overlooked is that the fees that investors pay for investment management services are, on average, the most consequential factor in their performance.

The moral of the story is that the most important thing retail investors can do when weighing their investment options is to compare them based on fees and make sure they're getting the cheapest option for the service they're getting.

Most people approach investing with a very different attitude. They want to know how the stock market is going to do over the next year, and whether or not they should invest in international funds because overseas markets will perform well, or whether small-caps will outperform large-caps or vice-versa.

I, too, think it would be great to have a crystal ball or a time machine but, unfortunately, even the experts aren't very good at predicting the future, let alone translating predictions into an effective investment strategy. We can predict death and taxes, as the old saw goes, and as investors, we can predict that we'll be charged fees.

The importance of fees was laid bare by a 2010 Morningstar study that concluded that expense ratios in mutual funds are actually a better predictor of performance than Morningstar's own star-ratings system that it uses to rate funds.

Fees are important and over time they can be very costly. An initial investment of $100,000 that grows 8% over 25 years would, at the end of that period, be worth $734,017.60. However, if management fees reduced the returns by 2% annually, the investment would only be worth $446,496.98, reducing the value of the investment by almost 40%. Many people don't realize that a fee that sounds as innocent as 2% can result in such a large cost over time.

Most fees paid by the average investor are mutual fund expenses, investment adviser fees and brokerage commissions, the per-transaction trading fees for buying and selling individual stocks. Brokerage commissions can be avoided by making few trades.

Excessive trading, in most cases, is counter-productive for investors anyway, so they should make smart initial decisions on where to invest their money and hold those positions for a long period of time to maximize their returns.

Stock quotes in this article: JPM, C, GS 

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 +2.54 0.14%
NASDAQ 4,095.5160 +9.2910 0.23%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs