I have held some of my individual holdings for a few years, and came to the realization that there have been no ongoing fees with those particular holdings.  That is a huge benefit of holding individual stocks that no one really talks about.

Mutual Funds and to a much lesser extent most ETFs have a lot of their fees (but not all) wrapped into their “Expense Ratio.”  According to MorningStar,

The expense ratio is the annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.

Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio, which is deducted from the fund’s average net assets, is accrued on a daily basis.

and according to Investopedia,

On the whole, expense ratios range from as low as 0.2% (usually for index funds) to as high as 2%. The average equity mutual fund charges around 1.3%-1.5%. You’ll generally pay more for specialty or international funds, which require more expertise from managers.

Wow an ongoing 1.5% fee! That doesn’t even include if there was a sales charge (on the front or back end) or on going management cost by an investment advisor.  I am not going to debate whether you “get what you pay for” as it is pretty easy to find articles arguing both sides (although to be fair it seems like right now the pendulum has swung to the index side of things).  Rather, I want to compare a growth rate of 6% across the board.

When Investing Fees Matter

Lets take a look at a couple scenarios involving an investor putting away $5,000 per year for 20 years.

Scenario 1 – We have our run of the mill investor who goes to an investment advisor who puts him or her into a front loaded (i.e. a 5% fee is taken off before you even invest) with a 1% fee mutual fund:

YearBOY BalanceAdditionsGrowth (6%)Expenses (1%)EOY Balance
1$0.00$4,750.00$285.00$50.35$4,984.65
2$4,984.65$4,750.00$584.08$103.19$10,215.54
3$10,215.54$4,750.00$897.93$158.63$15,704.84
4$15,704.84$4,750.00$1,227.29$216.82$21,465.31
5$21,465.31$4,750.00$1,572.92$277.88$27,510.34
6$27,510.34$4,750.00$1,935.62$341.96$33,854.01
7$33,854.01$4,750.00$2,316.24$409.20$40,511.04
8$40,511.04$4,750.00$2,715.66$479.77$47,496.94
9$47,496.94$4,750.00$3,134.82$553.82$54,827.94
10$54,827.94$4,750.00$3,574.68$631.53$62,521.09
11$62,521.09$4,750.00$4,036.27$713.07$70,594.28
12$70,594.28$4,750.00$4,520.66$798.65$79,066.29
13$79,066.29$4,750.00$5,028.98$888.45$87,956.81
14$87,956.81$4,750.00$5,562.41$982.69$97,286.53
15$97,286.53$4,750.00$6,122.19$1,081.59$107,077.13
16$107,077.13$4,750.00$6,709.63$1,185.37$117,351.39
17$117,351.39$4,750.00$7,326.08$1,294.27$128,133.20
18$128,133.20$4,750.00$7,972.99$1,408.56$139,447.63
19$139,447.63$4,750.00$8,651.86$1,528.49$151,321.00
20$151,321.00$4,750.00$9,364.26$1,654.35$163,780.90
$14,758.66

 

Scenario 2 – No Load but still has a 1% fee

YearBOY BalanceAdditionsGrowth (6%)Expenses (1%)EOY Balance
1$0.00$5,000.00$300.00$53.00$5,247.00
2$5,247.00$5,000.00$614.82$108.62$10,753.20
3$10,753.20$5,000.00$945.19$166.98$16,531.41
4$16,531.41$5,000.00$1,291.88$228.23$22,595.06
5$22,595.06$5,000.00$1,655.70$292.51$28,958.26
6$28,958.26$5,000.00$2,037.50$359.96$35,635.80
7$35,635.80$5,000.00$2,438.15$430.74$42,643.20
8$42,643.20$5,000.00$2,858.59$505.02$49,996.78
9$49,996.78$5,000.00$3,299.81$582.97$57,713.62
10$57,713.62$5,000.00$3,762.82$664.76$65,811.67
11$65,811.67$5,000.00$4,248.70$750.60$74,309.77
12$74,309.77$5,000.00$4,758.59$840.68$83,227.67
13$83,227.67$5,000.00$5,293.66$935.21$92,586.12
14$92,586.12$5,000.00$5,855.17$1,034.41$102,406.87
15$102,406.87$5,000.00$6,444.41$1,138.51$112,712.77
16$112,712.77$5,000.00$7,062.77$1,247.76$123,527.78
17$123,527.78$5,000.00$7,711.67$1,362.39$134,877.05
18$134,877.05$5,000.00$8,392.62$1,482.70$146,786.98
19$146,786.98$5,000.00$9,107.22$1,608.94$159,285.26
20$159,285.26$5,000.00$9,857.12$1,741.42$172,400.95
$15,535.43

 

Scenario 3 – He figures out he is getting ripped off with those fees and gets into a .25% fee Mutual or Index Fund:

YearBOY BalanceAdditionsGrowth (6%)Expenses (.25%)EOY Balance
1$0.00$5,000.00$300.00$13.25$5,286.75
2$5,286.75$5,000.00$617.21$27.26$10,876.70
3$10,876.70$5,000.00$952.60$42.07$16,787.22
4$16,787.22$5,000.00$1,307.23$57.74$23,036.72
5$23,036.72$5,000.00$1,682.20$74.30$29,644.63
6$29,644.63$5,000.00$2,078.68$91.81$36,631.50
7$36,631.50$5,000.00$2,497.89$110.32$44,019.06
8$44,019.06$5,000.00$2,941.14$129.90$51,830.31
9$51,830.31$5,000.00$3,409.82$150.60$60,089.52
10$60,089.52$5,000.00$3,905.37$172.49$68,822.41
11$68,822.41$5,000.00$4,429.34$195.63$78,056.12
12$78,056.12$5,000.00$4,983.37$220.10$87,819.39
13$87,819.39$5,000.00$5,569.16$245.97$98,142.58
14$98,142.58$5,000.00$6,188.56$273.33$109,057.81
15$109,057.81$5,000.00$6,843.47$302.25$120,599.03
16$120,599.03$5,000.00$7,535.94$332.84$132,802.13
17$132,802.13$5,000.00$8,268.13$365.18$145,705.08
18$145,705.08$5,000.00$9,042.30$399.37$159,348.02
19$159,348.02$5,000.00$9,860.88$435.52$173,773.38
20$173,773.38$5,000.00$10,726.40$473.75$189,026.03
$4,113.67

 

Wow! more than a third of the fees are gone and you end up with tens of thousands of more in principal! 

While I created the above spreadsheets it isn’t hard to find similar calculations on low cost providers like, Vangaurd who included the following graphic in their piece of “Why Costs Matter” where they took a lump sum investment of $100,000 growing at 6%

Vanguard Cost_Figure1However, buying individual stocks is rarely thrown into the mix.  Lets take a look at buy 10 of your favorite stocks at $8/trade:

YearBOY BalanceAdditionsGrowth (6%)ExpensesEOY Balance
1$0.00$4,920.00$295.20$0.00$5,215.20
2$5,215.20$4,920.00$608.11$0.00$10,743.31
3$10,743.31$4,920.00$939.80$0.00$16,603.11
4$16,603.11$4,920.00$1,291.39$0.00$22,814.50
5$22,814.50$4,920.00$1,664.07$0.00$29,398.57
6$29,398.57$4,920.00$2,059.11$0.00$36,377.68
7$36,377.68$4,920.00$2,477.86$0.00$43,775.54
8$43,775.54$4,920.00$2,921.73$0.00$51,617.27
9$51,617.27$4,920.00$3,392.24$0.00$59,929.51
10$59,929.51$4,920.00$3,890.97$0.00$68,740.48
11$68,740.48$4,920.00$4,419.63$0.00$78,080.11
12$78,080.11$4,920.00$4,980.01$0.00$87,980.12
13$87,980.12$4,920.00$5,574.01$0.00$98,474.12
14$98,474.12$4,920.00$6,203.65$0.00$109,597.77
15$109,597.77$4,920.00$6,871.07$0.00$121,388.84
16$121,388.84$4,920.00$7,578.53$0.00$133,887.37
17$133,887.37$4,920.00$8,328.44$0.00$147,135.81
18$147,135.81$4,920.00$9,123.35$0.00$161,179.16
19$161,179.16$4,920.00$9,965.95$0.00$176,065.11
20$176,065.11$4,920.00$10,859.11$0.00$191,844.22

 

Your ending principal is higher than the three previous examples, albeit not by much with a low cost provider.

Why Don’t More People Invest in Individual Stocks

In a word, risk.  Even if a person doesn’t actively follow the investing world or personal finance blogs they will know that diversification is important.  The type of risk inherent in buying a single equity is not for everyone, nor should it be.  Notwithstanding, this benefit of owning individual stocks should get a little bit more media attention than it does.  If I had to guess why it doesn’t get much attention – advertising money.  Every other ad in Money Magazine is for a mutual fund (and often a high expense one at that) – buying a stock for $8 doesn’t exactly pay the bills.