I’m sitting in a hairdressing chair. The hairdresser sprays into my hair some super-hi-fi hair product that has just been launched on the market and praises its incredible effects. I don’t understand anything from his speech, but I smile, nod, and praise the smell of the product. When twenty minutes later it is time to go to the checkout to pay, the hairdresser picks up the product at the counter and asks; will this still be taken home?
In the past, I always replied in this situation that put but. I never dared to ask what the product did, and I didn’t dare to ask what it cost. I just wanted to look like such a wonderfully relaxed mommy who takes care of her hair and doesn’t sweat because of the price of some treatment spray. Every time the jar got to follow me home, and every time after a couple of weeks of use it was left in the mirror cabinet to dust.
Last week I got a question; what is the most common mocha a novice investor usually does?
The question could also be worded this way; what do buy hairdressing products and investing in funds have in common?
Well, the fact that sensible, adult people agree to buy something without knowing it
what does the product contain (where does the fund invest?)
what does it cost (what are the fund’s costs?)
Surprisingly few fund investors have anything to worry about what they pay the bank for that list. Why don’t they ask for a price?
For the same reason that I didn’t ask the price at the hairdresser. In a bank meeting, you want to seem like a responsible type who has a life in possession and who, of course, understands what the real annual interest rate means and what kind of management costs it makes sense to pay from the fund. At any cost.
But! No worries. In this post, you’ll find out everything you need to know about investing costs. All this now for only € 9.99!
Expenses, expenses, expenses
The money is invested in the hope that it will receive some return on the stock exchange. Well, expenses eat up that revenue. Besides, expenses are always paid, no matter how successful the investment is.
So believe me when I say that expenses are worth keeping an eye on. In the worst case, the costs make investing completely pointless.
I have compiled this list under various expenses that are worth investor to minimize or even a map. These can usually be found in the fund’s key prospectus or on the stockbroker’s website.
Book-entry account maintenance costs and securities custody costs
Some cobblestone banks charge a fixed monthly fee for maintaining a book-entry account and custody of securities. Since there are service providers who do not charge anything at all for a book-entry account, such maintenance costs sound very salty to your ear. It may be that such a service provider offers some hi-fi added value, but for such a lazy book-entry account maintenance costs are an absolute no-no.
For direct stock transactions, you have to pay a trading fee to the stockbroker. The cost can be a percentage of the purchase price but often includes a fixed minimum cost. For this reason, it is not advisable to trade shares for too small amounts, as we do not want to pay a relatively unreasonable expense for the purchase of a share. According to the rule of thumb, it is not worth buying a share of an individual company for less than 500-1000 euros. This, of course, depends on the stockbroker’s Price List.
Some management companies may charge an investor a subscription fee when purchasing a fund unit. The subscription fee is added to the price of the fund unit. The fee can be either a fixed cost or a percentage of the purchase price.
Sometimes you also have to pay when you want to sell a fund unit. The redemption fee will be charged at the time of sale, less the cost of the sale price.
The management costs of the funds are current. It is therefore particularly important to keep an eye on them. Active funds generally charge higher management fees than passive index funds. I prefer index funds, as you know. The rules of the rule vary, but it is said that it is worth paying a maximum of 0.5 to 1% of the fund’s management costs.
The management fee is calculated as follows: if the management fee is 2% and the average value of the fund is € 1,000 during the year (average because its value fluctuates daily and you may invest even more money during the year), you pay management costs 1000 x 0.02 = € 20 per year.
It is good to understand that the interest rate phenomenon also applies to expenses. Although 2% does not sound like much in the short term, it will result in a very juicy salary for the bank over decades.
TER (Total expense ratio)
TER includes all other expenses except trading expenses. Like the management fee, TER is calculated as a percentage of the fund’s capital (i.e., the money you have in the fund). If the total expense ratio is 2.5%, and the value of your fund units averages € 1,000 during the year, you will pay 1000 x 0.025 = € 25 for the fund in its entirety per year.
Running costs tell you how much the fund has paid over the past year. The number of running costs may vary from year to year. At times, in the key prospectus, management costs, total expense ratio, and running costs differ. Don’t be confused, always look at the biggest number. That’s how much you have to pay.
Currency exchange expenses
When investing in a share or fund that is traded in a currency other than the euro, you will have to pay a currency exchange fee. Depending on the stockbroker, currency exchange can usually be done in your currency account. If you do not have a currency exchange account, the stockbroker will handle the currency exchange for you. Then the cost of currency exchange is often a little higher.
When you want to sell investments you have to pay capital gains tax.
Can you think of any other investment costs that I haven’t figured out to add to this list? Report them in the comments field!
Finally, a summary of the posting;
Remember in every purchase, feel free to ask, what does this cost?
Don’t care what other people think of you <3