The invisible leak
Also called: fees, the leak
Investment fees — small, automatic, charged every year, and almost never noticed.
Fees are called a leak rather than a cost because of how they behave. Nothing is ever taken out in a way you can see. There is no bill, no moment of payment, no line on a statement saying what left. A small percentage is simply skimmed from the balance each year, whether the year was good or bad.
And because it is charged on the whole balance annually, it compounds against you exactly as returns compound for you. You lose the fee, and everything the fee would have earned for the rest of your life.
The arithmetic is brutal and worth seeing once: on a pot compounding over thirty years, paying 1% a year instead of 0.2% costs roughly a fifth of the final amount. At 2%, closer to two-fifths.
The leak is also the one part of investing you can measure in advance. Returns are unknowable; costs are printed. That asymmetry is the whole reason to look.
Words on this page
- Expense ratio — The percentage of your money a fund charges each year, taken automatically whether it performs or not.
- Compound interest — Interest earned on your interest, so growth accelerates instead of staying flat.
Related terms
Covered properly in Learn.
This term appears in the glossary of The Quiet Fortune, Volume I.