Want to boost your savings in 2019? Please read this
Everyone wants to boost their savings. And many people see the start of a new year as a chance to get their finances on track, pay down debt, and start saving for the future.
The good news is that it’s never been easier to manage your money. Today, there are a multitude of online blogs offering advice on how to reduce your expenditure, pay down debt, save, and invest. There’s also a selection of apps that link to your bank account and use artificial intelligence to help you control your finances.
Robo investors are part of this trend. It’s never been so easy to invest your money sensibly with companies like Nutmeg, which ask you a few simple questions and then construct a portfolio using funds tailored to your own risk preferences and long term goals.
However, before you set out on your savings boosting journey in 2019, there’s something I think you should be aware of, and that’s investment fees.
Holding you back
Apart from falling stock prices (which we as investors cannot control), investment fees are the single biggest drag on investment returns over the long term.
And even though the investment management industry has been proactive as a whole cutting costs, there’s still some providers out there that think they can get away with charging the earth for very limited services.
In its first annual report of fund charges, which was published earlier this year, the European Securities and Markets Authority discovered that the charges on EU-regulated funds sold to retail investors accounted for a quarter of gross returns between 2015 and 2017.
On average, the regulators discovered that equity funds charge around 2% per annum. In comparison, you can buy a FTSE 100 tracker fund that charges less than 0.1% per annum.
The impact this can have on your savings over the long-term is, to put it quite simply, tremendous.
Huge costs
Over the past 10 years, the FTSE 100 has produced an annualised total return of approximately 8%. With fees of just 0.1% per annum, £10,000 invested in a low-cost tracker fund would be worth £21,390 after a decade — not a bad return for no work.
On the other hand, an active equity fund also produced a return of 8% per annum before fees, but just 6% after fees. That would grow a similar £10,000 investment to £17,908, a gap of £3,482. The longer the investment time horizon, the worse the performance gap becomes.
Over 50 years, the FTSE 100 low-cost tracker fund would turn £10,000 into £469,000, assuming an average annual return of 8% with fees of 0.1% per annum. And what about the active equity fund? Well, using the same investment over the same time horizon, but at a lower annual return rate of 6% after deducting fees, your £10,000 would grow to be worth just £184,200, a staggering underperformance of 61%, or £284,800. That could be the difference between a comfortable retirement, or several more years of hard work.
The bottom line
So, if you’re looking to boost your savings in 2019, the simplest thing to do to help your finances in the long term is to move your money into low-cost funds today.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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