As investment legend Warren Buffett has argued for years, inexpensive index funds are the perfect investment for most people. Paying more than the ratios for an actively managed fund rarely yields the results of the average market, which is achieved by index funds, while everything costs 1% – 2% instead of> 0.3%.

If we assume that the average person cannot beat the market, that is, reliably profit more than an average of 9%, which market will return in the long run, then our goal should be to achieve this average market. And if that’s our goal, we need to look for the cheapest way to do it.

Many of the best trading platforms in the UK offer ETFs for free, and while it’s not quite the same as the Vanguard Global All Cap Fund, it’s very similar. Also, we see how investors are put into unnecessary costs when we look at Roboadvisors.

Many Roboadvisors encourage users to manage their investments using their automated algorithm. The fact is that their automated Algo trading is very similar to Vanguards, only they are trying to look more affordable with rounding costs and easy direct debit. Expenditures are often twice as large as the Vanguard Fund (0.5% instead of 0.22%), but the underlying investments are very similar.

Even if you want to invest in something less diversified and secure, such as individual companies or cryptocurrencies, the goal still remains the same: cost reduction. Trading platforms that offer no-commission stocks are a big reason for the growth of retail investors over the last couple of years; something even more immortalized by a pandemic.

An example of why costs can ruin an investment

If you invest £ 100,000 in a fund or account with a profit of 6% per year, in 25 years you will get £ 430,000. However, if a 2% commission had been incurred, many would automatically have thought that a profit of £ 430,000 would have been 2% less – this could not be further from the truth.

If the investment has 2% of the annual fee, the investment will actually bring in £ 260,000 – far from £ 430,000. In fact, in the non-expenditure example, the profit (excluding the initial investment of £ 100,000) is £ 330,000, while in the 2% expenditure example, the profit is £ 160,000, less than half.

Thus, 2% of costs gave less than 50% of profits. If you take into account inflation, then suddenly a good, it would seem, investment can be terrible.

Fortunately, when you purchase a crypto and stock you face only one-time costs (if at all), but many other investments, such as real estate syndicates, will incur significant annual management costs that can unknowingly ruin an investment.

Closing remarks

How people build their portfolios depends on their goals, risk preferences and knowledge. Inexpensive index funds may not be the answer for those who have a short term investment (i.e. they will need funds to make a home deposit in 4 years). However, whatever the investment, costs need to be considered and minimized. This also applies to retirees who convert their pension – banks offer horrible rates that will eat up your pension. You can find fair bargain deals (both exchange rates and fees) with new tech professionals.

Why Low-Cost Investing Is More Important Than You Think

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