Fees and costs
Fees compound too — over the years they eat far more than you'd think.
In One Sentence
The return you actually get is whatever is left of the market's return after every fee has been taken out.
Why It Matters
Bogle called this "the relentless rules of humble arithmetic." Many people think one or two percentage points a year is no big deal, but fees compound year after year just as returns do. One snowballs for you, the other snowballs away from you, and the longer the time, the wider the gap. That's why I see choosing a low-cost broad-market ETF as another way of buying low.
One Number
Say the market returns 8% a year and you invest NT$10,000 for 50 years. With fees of about 0.1% a year, you end up with about NT$448,000; with fees plus trading costs of about 2.5%, you're left with only about NT$145,000 (author's estimate · Chapter V).
In the Book
In the "Buying Low" section of Chapter V, a 50-year calculation shows how fees compound, and the expense ratio is also the first checkpoint for choosing an ETF. Chapter III points out that about two-thirds of Taiwanese individual investors' trading losses went to commissions and transaction taxes.
Go Further
- Compounding Compounding doesn't play favorites: it makes fees grow, too.
- John Bogle He championed low costs his whole life.
- Broad-market index ETFs It trades little and has the lowest expense ratios.
- Active vs. passive Cost is one of the reasons active funds trail the market.
- The cost of trading The more often you trade, the more you pay in commissions and taxes.