Ensuring Long-Term Investment Success: Keeping Costs Low - dummies

Ensuring Long-Term Investment Success: Keeping Costs Low

By David Stevenson

Part of Managing Your Investment Portfolio For Dummies Cheat Sheet (UK Edition)

In addition to running focused trades and using well-thought-through strategies, the key to long-term investment success is keeping costs to the absolute minimum. Here are some of the costs to keep in mind:

  • Trading costs: Based on actual dealing, these are of course a hugely important factor.

  • Bid–offer spread cost: Between the buying and selling price of a security this can easily amount to a few per cent (though most liquid investments shouldn’t cost you more than 0.30 per cent).

  • Expressing a particular investment view: For instance, many hedge-fund managers trade in and out of exchange-traded funds, which incur running expenses when tracking a major index. These management fees can amount to as much as 1 per cent per year (although most charge less than 0.50 per cent).

  • Investing directly in hedge funds: Usually done through a mutual fund or unit trust or via a stock market listed vehicle, these actively managed funds charge fees that can easily amount to 2 per cent per year as well as an additional ‘performance fee’ (the trigger for an extra payment can be as little as a few per cent a year).

    Add in the fund fees, include the costs of running your tax wrapper (401k pension fund in the US or self-invested personal pension plan in the UK) and suddenly the total ownership cost is above 3‒4 per cent per year.

    Consider targeting net costs of less than 1 per cent per year, with long-term real returns (before costs) of 6‒8 per cent per year.