In recent years, there has been a shift in investing from active funds, which cost more because of their staff of decision-makers and researchers, which may eat up 1-2 per cent of their value per year, to cheap index funds which may cost as little as 0.07 per cent.
And with the S&P 500 in the US returning 23 per cent in the last year and 88 per cent in the last five years – returns mirrored in the tracker funds which use the same investments - active managers have a hard time competing and beating that sort of growth.
But on fees of 1.25 per cent, a quarter of your five per cent returns are getting chewed up and you will have £150,875 – more than £50,000 less and all because of that extra one per cent fee.
After all, your five per cent growth is only being shrunk by 0.25 per cent in fees.
Active funds, where a manager decides what to invest in, and passive, also known as index or tracker funds, which just mimic a market such as the FTSE 100 in London or Wall Street’s S&P 500.
