It is difficult to predict future returns, but you can be certain of improving outcomes by minimising costs.
Costs are predictable and certain, while returns are uncertain. You cannot be certain an active fund manager charging 1% will outperform a passive index fund charging 0.05%. Only the 0.95% fee difference is certain.
Think about costs as a proportion of your returns, not your portfolio value. If costs are 2% and returns are 10%, costs consume 20% of your returns.
Platform Fees & Trading Costs
Two types of costs you'll encounter with most investment platforms.
Platform fees
An ongoing fee for the platform service, charged regardless of trading activity. Some charge a percentage of assets (may suit smaller portfolios), others a flat regular fee (may suit larger portfolios).
Trading fees
A brokerage fee for each buy/sell trade, usually a fixed cost per transaction. Covers stock exchange costs. Can add up with frequent trading.
Many countries charge taxes on share purchases (e.g., stamp duty). These vary by jurisdiction and often don't apply to funds or ETFs.
Fund Charges
Funds charge an annual management fee, described as a percentage of assets. These costs are usually paid daily out of the fund's assets and cover the costs of managing the fund.
There are other costs incurred by funds that are typically not included in the annual management fee and rarely disclosed. These include costs of buying and selling securities inside the fund — brokerage fees, taxes, and spreads.
Hidden Costs: Spreads
Investors typically encounter a “spread” when buying or selling investments. Markets generally charge more when you buy and pay less when you sell. The spread is the difference between these two prices.
When spreads are larger
Academic Evidence
Research consistently shows that lower-cost investments have outperformed higher-cost alternatives over long periods. This is basic mathematics — costs directly reduce returns.
“Under plausible conditions, a person saving for retirement who chooses low-cost investments could have a standard of living throughout retirement more than 20% higher than that of a comparable investor in high-cost investments.”
William Sharpe · Financial Analysts Journal, 2013
“Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.”
Morningstar FundInvestor, 2010
Costs are certain. Returns are not.
Minimising costs is a reliable way to improve outcomes.
Think proportionally.
A 2% cost on 10% returns consumes 20% of what you earned.
Small differences compound.
Over decades, even a 0.5% fee difference has a dramatic effect.
Balance costs and diversification.
Larger portfolios may be better suited to more granular investments because costs become a smaller proportion of overall value.