.png)
Compounding (reinvesting investment gains) can have a wondrous effect on your wealth over the long term. Assume that you invest $1 million that grows by 5% annually for a period of 30 years. If everything goes according to plan, you should actually end up with a whopping $4,322,000 which over the entire period is an appreciation of 322%.
But what happens if you include fees in the equation? Assuming in the above example a 3% all in fee per annum, the final amount shrinks to $1,733,000, for a total gain of 73% over the 30 years and a startling difference of $2,589,000 when compared to the "no fee" version. If we cut the fees to 1.5% per annum, we arrive to a total of $2,746,000, for a gain over the period of 174% which brings the difference with the "no fee" version to $1,576,000.
To conclude, compounding has a substantial effect on the rate of growth of an investment. Because the effect is so significant, chipping into it also has a materially negative impact on the long term growth rate. In other words, if you wish to achieve a reasonable growth rate for your investments over the long term, it is not only important to be aware of the total amount of fees that you are paying, but also to ensure that these fees are reasonable and competitive for the services that you are obtaining.
Finally, the graph below illustrates these exact same concepts but in a more realistic setting: investing into the S&P 500 over the past 30 years. The results are no less startling!
.png)
