If you are like most people, then probably haven’t thought much about how your investments stack up in terms of the hidden costs they carry. These “hidden” expenses can make a big difference to your long-term investing success. There is no clear answer for which investment might have more hidden costs than others. But here I am listing 4 main points that you should consider before making any decision.
Look for these four signs that something may be amiss with your investment:
Sales loads are always bad news. These are fees charged by mutual funds to cover the cost of commissions paid to financial advisers and/or brokers who sell these funds. There are front-end sales loads that must be paid when you buy into a fund, while there are back-end charges called “deferred” sales charges that come along when you sell your shares in the fund. Taken together, it’s all too easy for one or both of these types of charges to wipe out several years’ worth of investment returns over time.
Annual operating expenses average 1% or more per year. Some investments have annual operating expenses more significant than 2%. When you invest in an index fund, for example, management costs should be less than 0.20%, plus any fees associated with trading securities in the fund’s portfolio.
The fine print is where the hidden costs are buried. You should read all the documents that accompany your investment – i.e., prospectuses, sales literature, etc…. Hidden costs often catch people off guard and seem to come out of nowhere.
The investment does not serve your needs. Some investments might look good on paper but end up not working out for your specific circumstances or risk tolerance level. For instance, some annuities have surrender charges against investors who try to take out their money before the agreed-upon period has lapsed. This is but one example of the hidden costs that have popped up from time to time. You have to carefully weigh all your options before making any major decisions on which investments you will choose for your portfolio.