Another example is debt. Pay a higher annual fee for a credit card, and the more of a drag it is when you're paying it back.
Not only is there the amount borrowed and the interest rate to cover, but the fees on top of that as well. Paying off the card takes that much longer.
So the more we pay, the more it affects our results. It's up to us to gauge if what we're paying is worth it.
Race you to the bottom?
Now you might think I'll say that the most important numbers on the KiwiSaver fund finder are the fee figures. Actually no. What counts most are the returns: the performance figures - after fees (and taxes) have been taken out. This is about results.
One of the lowest-fee balanced funds for which we have results for the past five years, for example, looks like this:
So that's an above-par 8.17% return over the past five years (the average was 7.72%). That's after taxes and 0.85% in annual fees were taken out.
The lowest fees, however, do not always guarantee the best results.
We can't just all race to the bottom and pick the cheapest option without looking at what we're doing.
Pay a bit more, the fund managers tell us, and we'll get you better results. And they might. Here's a good example: the highest performing balanced fund over the past five years, with higher annual fees of 1.20% (although still slightly under the average of 1.29%).
That's the category-best result of 11.03%, after taxes and 1.20% in fees have been paid. In this case, had we known what was to happen in these past five years, paying a bit more in fees would have been worth it.
Should I pay more to get better results?
But it's not always so. Let's say over the past five years you wanted to spend it up to shoot for even better results, like paying for the most expensive balanced fund out there. Is this what you'd expect?
As you see, you're paying the highest fees at 1.65%, but the returns have been below-par at 6.84% (again, the average for balanced funds was 7.72%). Had those fees been less expensive, the results would have been much improved. The value could have gone to us instead of to pay the fund manager.
This is where finance defies the saying "You get what you pay for" - you might not. Less generally means more.
No one can tell the future
Paying more would be worth it if future returns were guaranteed - if the wine were already in the bottle. Unfortunately it's not. We cannot predict the future based on what's happened thus far. Economies, markets, fund managers change.
Since there's no crystal ball, most of us should just work on keeping our fees as low as possible. Thankfully we are able these days to see the price tag - how much these funds cost.
And in this bizarre world of finance, those fees are worth keeping an eye on. Have a look for yourself.
Get Sorted is written by Sorted's resident blogger, Tom Hartmann. Check out the guides and tools from Sorted - brought to you by the Commission for Financial Capability - at sorted.org.nz.
