Topic: Total Returns, Minus Investment Fees
Correct Answer: #1, $10,850
Fees are incurred across the year even as your nest egg appreciates. So if your fees annualize to 1.5% and your net returns annualized to 10%, you’re actually making a gross return of just 8.5% each year.
There can be some fuzziness here if the market is very volatile — for instance, if your money doubled in the first quarter of the year to $20,000 and your manager charges quarterly fees, your fee that quarter will be steep. The same holds true if your fees are incurred more frequently. But this example we’re assuming a pretty slow and steady path for your portfolio.
Note that 10% of your portfolio would be $1,000… but your manager has gobbled up $150 of that in fees. That may not sound like a lot, but when compared to your actual market returns he is charging almost 18% of the $850 you’ve made!
