Investing

The importance of the commission: when the manager wins with your fund more than you

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What is the most important thing when it comes to choosing an investment fund or a pension plan? It seems obvious: profitability. In the end, we invest to make a profit from our savings. The greater they are, as long as it is without assuming more risk than necessary, the better. However, there is a very important part of this future profitability to which many investors pay too little attention: the commissions we pay.

Money costs a lot to save, so every dollar we pay for management must translate into good results for our money. And the key is not so much to pay more or less commission, as the return we get for that payment is greater or less.

For example, you may be willing to pay 9,000 dollars in commissions over a 20-year period starting at 10,000 dollar investment if your fund has earned you 40,000 dollars in capital gains, but … Would you like to have a cost in commissions of less than half, only 3,700 dollars, if you only get 1,800 dollars in earnings over this period by this term?

What is this ratio between commissions and expected profitability in your particular fund? We invite you to discover it with tools from Vanguard and Bankrate.

CALCULATE THE COST OF YOUR FUND

The commission, in addition, has another indirect effect on the future profitability that investors must take into account: the opportunity cost of paying this money each year and not having invested in a more profitable option. The tremendous difference can be seen especially in high investment amounts and very long terms. This is produced by the effect of compound interest. As profits accumulate, profitability is calculated each year from a larger base, so the impact is increasing over the years.

What can we do if we have a fund for which we are paying too many commissions for the profitability that offers us and shuffle change? If we have capital gains with our fund, obviously the best thing is to look for is a fund with lower commissions.

Take a closer look at the commissions you’re paying and see if it’s worth it, given the profitability (or lack thereof), that it has achieved. You may actually be better off with a robo advisor, mutual fund, or a portfolio that is not being actively managed.

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