Focus more on investment fees than past performance
- Robin Powell
- Mar 24
- 3 min read
When investing, many people focus on past performance, but fees and charges are far more important in the long run. LOUISE COOPER highlights that fees compound just like returns and can seriously reduce the size of your pension or other long-term investments.
Understanding the total cost you pay is difficult because fund managers often obscure fees to protect their profits. This lack of transparency benefits the fund management industry, not investors.
Performance may grab headlines, but consistently beating the market is rare. The industry heavily markets the few funds that outperform in any given year, even though that performance is unlikely to continue. This focus distracts investors from the real issue controlling fees.
Key takeaways
1. Investment fees compound and reduce returns significantly
Even a 1 or 2 percent fee can halve the size of your pension over decades. Fees build up and work against you just like investment returns do.
2. Total investment costs are often hidden
Fund managers benefit from keeping fees unclear, making it hard for investors to know what they are really paying.
3. Past performance is not a reliable guide
Funds that perform well in one year often perform poorly the next. The industry promotes top performers to attract money, but this does not guarantee future success.
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TRANSCRIPT
Robin Powell: When you read about investing in the media, the focus is almost always on performance.
But there’s something more important you need to think about — and that’s the fees and charges you pay.
Louise Cooper: Fees are the most important thing that you need to think about when investing.
Most people also invest for decades. You think about it. You're investing for your children's education or to buy a home or for your pension, probably the most valuable asset you will ever have along with your home. Then that is a multi decade investment.
And what people don't understand is, returns compound but so do fees.
And so if you are paying on a 1 or 2% fee, your pension could be half the size it should be. I mean this is the impact. It has absolutely massive fees, costs, everything.
RP: Despite the importance of fees and charges, it isn’t easy for investors to find out the total cost they’re paying.
Why? For Louise Cooper, the reason is obvious.
LC: Costs are quite complicated and it benefits the fund manager to hide those costs. So unsurprisingly, as investors, as consumers, we have no information or very little information about true costs.
Costs have been hidden, still are hidden from investors.
And that's because fees make so much money for the fund management industry. Huge amounts of money.
If it's costing you, it's going to the fund manager. So, unsurprisingly, it's very difficult to get information from fund managers about costs.
RP: Of course, performance is not irrelevant. But what the industry doesn’t want you to know is that only a tiny proportion of fund managers consistently beat the market in the long term.
LC: The point about investment performance is, like anything, it has a normal distribution.
So in any year there will be some funds that outperform some of them on the right tail of that normal distribution that do well. So what the fund management industry does is market the hell out of those few funds.
Stupidly investors then buy those funds.
But because one year's performance is no guide to future performance, those top performing funds one year become the bottom performing funds for the next year, by which time they've got investors money investors don't bother to check.
So that is why we have this ridiculous focus on investment performance, because it benefits the fund management industry.
RP: So, don’t be fooled by the obsession with performance. It’s a distraction from a factor that’s more important, and that’s cost.
