Why Fees Deserve More Attention Than They Get
When investors think about performance, they usually focus on returns. What happened in the market. Did a certain stock outperform. How does my portfolio look compared to last year’s numbers.
But what often gets ignored is cost.
Expense ratios are easy to overlook because they are built into the investment itself. You never see a bill. The money is simply deducted in the background, year after year. Over time, that drag compounds in the wrong direction.
For heavily managed mutual funds and some actively managed ETFs, annual expense ratios often fall in the 0.50 percent to 0.80 percent range. In some cases, they can be higher.
That may not sound like much, but the math adds up quickly.
What Fees Look Like in the Real World
Most investors aren’t starting with a $2 million portfolio; instead, they’re starting with something closer to $50,000 or $100,000.
So let’s begin there.
Imagine you have $100,000 invested in funds with an average expense ratio of 0.75 percent. That comes out to about $750 per year in fees. This doesn’t feel dramatic. It barely registers.
But play it out over ten years. Even without factoring in growth, that’s $7,500 being quietly removed from your portfolio.
Now add compounding to the equation.
That $750 per year is not just money paid out. It is money that no longer has the chance to grow. Over 20 or 30 years, the lost opportunity can easily reach tens of thousands of dollars on a relatively modest account.
Scale that same structure to $250,000, and annual fees rise to about $1,875. At $500,000, you are paying roughly $3,750 each year. Again, this is before considering compounding.
By the time portfolios reach seven figures, the cost becomes impossible to ignore. A $1 million account at 0.75 percent is losing $7,500 every year to fees alone; that’s a pretty hefty price for diversification.
Most importantly, those fees are owed regardless of performance.
You pay them in strong markets.
You pay them in weak markets.
You pay them even when returns are flat.
The market may fluctuate, but expense ratios never take a day off.
Fees Loom Large as Your Portfolio Grows
Fees feel small when balances are small. They stop feeling small very quickly as your portfolio grows.
For example, start with $500,000 invested in higher cost funds carrying a 0.75 percent expense ratio. That works out to roughly $3,750 per year in fees. Over ten years, you are approaching $40,000 paid simply to maintain exposure, and that is before factoring in compounding.
Now move that same structure to $2 million. At a 0.75 percent expense ratio, annual fees rise to about $15,000. Over a decade, that becomes nearly $150,000 gone to fund expenses alone.
At $5 million, the numbers become impossible to ignore. The same 0.75 percent fee translates to roughly $37,500 every year. If you stretch that number over ten years, you are looking at close to $375,000 paid out, again without accounting for compounding.
And importantly, these fees are owed regardless of performance. You pay them in strong markets and weak ones. They come out whether your portfolio grows or stalls.
This is why experienced investors focus on costs early. What starts as a small percentage quietly becomes a significant drag on long term returns.
A More Efficient Way to Build a Portfolio
There is nothing inherently wrong with diversification, in many cases it’s a smart strategy. The issue is paying too much for it.
A more cost-efficient structure often looks something like this:
- A portion allocated to individual stocks
Individual stocks do not carry expense ratios. This portion of a portfolio provides flexibility and upside potential without ongoing management fees. - A bond allocation using low-cost funds
Broad bond ETFs such as BND carry very low expense ratios and serve their purpose without unnecessary cost, especially for investors closer to retirement. - Core equity exposure through low-cost index ETFs
Funds like VOO provide broad S&P 500 exposure with expense ratios that are close to negligible by historical standards.
This type of structure allows investors to maintain diversification while dramatically reducing ongoing costs.
The Tradeoff Many Investors Do Not Realize
High fee funds often justify their cost through active management. The promise is better decision making, better timing, and better outcomes.
In practice, many of these funds struggle to consistently outperform low-cost indexes over long periods, especially after fees are accounted for.
Paying higher expenses does not guarantee better results. In many cases, it simply guarantees higher costs.
When investors develop the skills to manage portfolios thoughtfully, combining low-cost index exposure with selective stock ownership, the need for expensive diversification largely disappears.
Why This Matters More Over Time
Fees compound just like returns do. The difference is that compounding fees works against you.
Lowering expenses does not require predicting markets or picking winners. It is a controllable decision that, over long time horizons, can make the difference between meeting financial goals and falling short.
This is especially true for larger portfolios, where even small percentage differences translate into meaningful dollar amounts.
Final Thoughts
Cost control is one of the most overlooked advantages in investing.
Reducing unnecessary fund expenses allows more of your capital to stay invested and working for you. It is not about chasing performance. It is about keeping more of what your portfolio earns.
At Michael Leslie Investments, portfolio construction starts with efficiency. That means thoughtful diversification, selective stock exposure, and minimizing fees wherever possible so returns have room to compound.
Take Control of Your Investments
If you want to understand how investment fees are affecting your portfolio, and whether your current structure is costing you more than it should, contact Michael Leslie Investments to review your strategy with a focus on long term efficiency.
