Pie Funds’ Head of Investments Paul Gregory explains.

Three things help you reach your financial goals. One is risk and the other two are returns and costs.

Returns get you to your goal. So, returns are why you invest and why you take on risk.

When you know how long you have to get to your goal, and how much money you want, you’ll have a starting point for working out the returns you need. This is your ‘target’.

You can get to your target faster by:

· Starting with more money. The more you start with, the smaller the target needs to be.

· Putting in more. The more you contribute, the less you need returns from your investments.

· Other help. For example, with KiwiSaver, you get contributions from your employer and the annual tax credit from the Government. All of this boosts your balance.

As well, the earlier you start, the more time works for you.

Returns aren’t free

Usually, you’ll need returns to do a good job for you. Generally, the more returns you need, the more risk you need to take on, and the more you need to spend in fees. That’s particularly the case if you need high returns fast.

This is because, unfortunately, returns aren’t free. If you’re doing your own investing, you pay fees and costs. You might pay fees to an adviser who helps you decide what to invest in, or to brokers who do the investing for you.

If you’re investing through someone else, like a fund manager or a KiwiSaver provider, you pay fees to them.

The fees you pay reduce your return. You’ll keep paying fees for the life of the investment, even if you make a loss. Returns are unpredictable, but fees are constant. As an investor, it makes sense to either:

· Pay as little fees as possible, or

· Pay higher fees only if you are confident you will be getting higher returns.

CASE STUDY

Say your goal is to have $20,000 in 15 years’ time. You have $10,000 to invest and you can choose from two investments.

Let’s say they’ll both return the same (6% per year) and both have the same risk.

But the fees are different. One investment charges you 1% of your investment in fees each year, the other charges you 0.65%.

You’d end up with $1700 more by choosing the investment with lower fees (the orange one). Both investments get you to your $20,000 goal. But with the higher-fee investment, you get there with only a little to spare.

Imagine the difference in dollars over a longer time, or with higher returns, with a larger starting investment, or with regular contributions. It all adds up.

High fees aren’t always bad

This doesn’t mean high fees are bad.

Imagine if you were confident the higher-fee investment would give you an 8% annual return instead of 6%. In that case, you’d end up with just over $4700 more than the investment with the lower fee – so it would probably be worth paying the extra fees.

If you’re paying fees, you should be comfortable you’re getting value for them.

Mostly, this will be clear from the returns you get. But you can also get value from good service, convenience or other aspects, like investing in line with your values.

Everyone has a different idea of what it’s worth paying for.

But everyone should ask themselves the question – and ask their provider, too.

Your provider should be happy to have that conversation with you. If you’re not happy with their explanation, then perhaps you’re with the wrong provider.

First published 13 April 2018

JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. This story reflects the views of the contributor only. Content comes from sources that JUNO considers accurate, but we do not guarantee that the content is accurate. Charts are visually indicative only.