Cost of Mutual Fund Fees

In a previous blog we talked about fees and the transfer of money from your pocket. How much money are we really talking about?

Let's look at an example of $10,000 being invested at an average annual return of 9%. This means that every 8 years money doubles, from the rule of 72. You buy a fund that has a 8% front end load which means that you just handed over $800 in sales charges. Since it is a loaded fund the 12B-1 fee can be as much as another 0.5% per year or $50 the first year. We have a total of $850 in the first year.

You think no big deal $850, this mutual fund is great and I will get this back in no time. Wrong, this is a big deal!!!!!! You now lost the opportunity to make money that could go into your pocket.

How much did you lose with an 8% front end load and an extra 0.5% 12B-1 fee? For ease in illustration let's look at this every 8 years.

8 Years Later: $2,100 ($1,600 from load and $500 from fees)
16 Years Later: $4,800 ($3,200 from load and $1,600 from fees)
24 Years Later: $10,200 ($6,400 from load and $3,800 from fees)
32 Years Later: $21,000 ($12,800 from load and $8,200 from fees)

You lost your original $10,000 investment in about 24 years. OUCH!!!!!! The amount of loss grows rapidly by doubling in the next 8 years. The cost from fees becomes a bigger portion with time.

What is the value of $10,000 invested at 9% before fees and net after subtracting fees?

8 Years Later: $20,000 - $2,100 = $17,900
16 Years Later: $40,000 - $4,800 = $35,200
24 Years Later: $80,000 - $10,200 = $69,800
32 Years Later: $160,000 - $21,000 = $139,000

Bottom Line: This one is simple, BUY NO-LOAD MUTUAL FUNDS. More than 10% of your investment is consumed in loads and fees that should be in your pocket.