So I did a post on 10 things I thought all beginning investors should know. These are general principles and meant to hold 99% of the time. First up, costs matter.

#1 Costs Matter

I always tell my wife that she’d make a better investor than me. Why? Simply because she’s a better shopper than me and if investing isn’t all about buying low and selling high, then what is it? In other words, buying low is half the battle won.

It’s crazy but most people would find this a no-brainer. If you were buying a car and given the choice between two very similar cars, most people would look at the price as the deal breaker. However, when it comes to investing, many people believe that their bank relationship manager can give advice that allows you to beat the market when there is evidence to the contrary that most active fund managers struggle to beat the market. Also, add to that the fact that the relationship manager only follows a prescribed formula in their recommendation which means that the relationship manager is just an agent for the investment manager which means another layer of fees.

Take the following for example. Suppose two investments with identical rates of return (5%) have different costs- Investment A has an upfront cost of 3% while Investment B has an upfront cost of 1%. If each Investment requires an investor to put in $1000, after one year, the investor will end up with $1,018.50 if he or she went with A versus $1,039.50 if the investor went with B. Over a typical investment lifetime of 30 years, the sums are $4,192.28 versus $4,278.72. While the difference seems small, that’s because I used a small starting principle of $1,000. Most investment principles start from 5 or 6-figure sums meaning the difference is at least 10-100x the difference above.

Furthermore, funds typically have management fees which are deducted yearly making the difference in our example even more stark if you were holding on to a stock or even an index fund or ETF which has annual management fees that are almost close to zero percent.

In short, look at costs. The lower, the better.

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