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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.
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