Most people who invest in the stock market and mutual funds know about the power of compounding. With time, the returns on investment also start earning returns, due to which your wealth grows rapidly. But investment world stalwart and ‘Father of Indexing’ John C. Bogle believed that merely understanding the compounding of returns is not enough. Investors should also understand the impact of compounding costs, i.e. the expenses incurred on investment, because these small costs can significantly reduce your earnings in the long run.
Small expenses, but big impact
Every investment has some expense associated with it. Such as expense ratio of mutual funds, brokerage charges, transaction fees or the cost of frequent buying and selling. Initially these expenses seem very small, but when the investment continues for 15-20 years, these costs compound and have a big impact.
For example, if two investors get similar returns, but one investor’s fund has a higher expense ratio, his net worth in the long run may be significantly less than that of the other investor. That means, not only high returns, low costs are also an important part of better investment.
Why did you recommend low-cost index funds?
John Bogle always advocated investing in low-cost index funds. He believed that investors should try to capture market returns, but avoid unnecessary fees and expenses. By investing in a fund with low expense ratio, a major part of your income remains with you and in the long run this difference can amount to lakhs of rupees. His same thinking is still considered an important investment principle for investors around the world.
What things should be kept in mind while investing?
Experts say that while investing, one should not take decisions just by looking at past returns. It is also important to see what is the total cost of investment.
For this, keep some easy things in mind:
- Choose mutual funds with low expense ratio.
- Avoid repeated buying and selling without any need.
- Maintain investment for long term.
- Keep an eye on brokerage and other hidden charges.
- Review your investments from time to time, but do not make excessive changes.
The real income is what you have left.
The biggest lesson of John Bogle is that in investing, it is not only important how much your money grows, but it is equally important how much you have left after expenses. If you keep costs low and maintain investments for a long time, you can take full advantage of compounding.
That is, the mantra of successful investment is not only to earn high returns but also to reduce unnecessary expenses. This strategy is most helpful in building better wealth in the long term and achieving financial goals.
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