Lesson 3.5 · 5 of 5 · Risk and return
What investment fees cost you over 20 and 30 years: worked examples
An annual charge of 1% sounds small, but over 30 years it can take almost a quarter of your money. With $10,000 earning 7% a year before costs, after 30 years you have about $57,400 with a 1% annual charge and about $72,000 with a 0.2% charge.
Terms in this lesson
- TER
- What an ETF or fund costs you each year, as a percentage of the money invested.
- Trading commission
- What it costs you to buy, sell and hold shares at a broker.
- Bid-ask spread
- The gap between the price you can sell at and the price you can buy at, at the same moment.
- Exchange rate
- How much of one currency you get for another, such as dollars for a euro.
Opening question
A fund charges 1% a year. With a return of 7% a year, how much of your result after 30 years does that charge take?
The charge is taken every year, from the whole amount, and the money taken no longer grows. $10,000 at 7% a year grows to $76,123 in 30 years with no costs and to $57,435 with a 1% annual charge: 24.5% less.
It does not matter if you get it wrong: trying first helps you remember.
The fees you pay when you invest
- Dealing commissionPaid to your broker when you buy or sell: a fixed amount, a percentage or, with some brokers, nothing.
- The spreadThe gap between the buying and selling price. It never appears on a bill, but you pay it on every trade. See bid-ask spread.
- Currency conversionWhen you buy US shares with pounds or euros, the broker converts your money, usually with a fee built into the exchange rate.
- The fund’s annual chargeFor ETFs and funds: a percentage a year, taken from the fund’s value. It is called the TER.
Some brokers also charge other fees: for custody, for withdrawals or for an inactive account. You will find them in the broker’s list of charges, usually a document called something like “Rates and fees”.
Work it out
You buy £2,000 of US shares. Your broker charges 0.5% for the currency conversion and a £5 commission per trade. How much do you pay in total for the purchase?
A hint
Work out 0.5% of £2,000 first.
0.5% of £2,000 = £10 for the conversion, plus £5 commission: £15. That is 0.75% of the amount, paid once. If you sell later, you pay again.
What a fund’s annual charge (TER) is
Definition
What is the TER?
The percentage a year the fund takes from your money to run itself.
The TER (total expense ratio) is taken from the fund’s value a little at a time, every day. You never get a bill: you only see it as a slightly lower return. An ETF with a TER of 0.2% costs you $20 a year for every $10,000 invested. A fund charging 1% costs you $100.
Per $10,000 invested.
For comparison: on 28 October 2026, the European (UCITS) ETFs tracking the S&P 500 on justETF’s UK list had TERs of 0.03-0.15% a year. Actively managed funds usually charge more.
Check yourself
How do you pay an ETF’s TER?
How sure are you?
The TER comes out of the fund day by day, in good years and bad. You never see it as a separate payment, which is why it is easy to forget.
Work it out
You have $25,000 in a fund with an annual charge of 1.5%. Roughly how much does it cost you in the first year?
This exercise is in the free account, where we also save your progress.
Create a free account1% versus 0.2% a year: what you lose over 20 and 30 years
Example
How much does the difference in charges matter?
Over 30 years, $14,533 for every $10,000 invested.
The same $10,000 investment, earning 7% a year before costs. With a 0.2% annual charge you end up with $71,968. With 1% a year, $57,435. With no costs at all you would have had $76,123.
$10,000 invested once, for 30 years. Return after costs: 7% minus the annual charge.
| Annual charge | After 10 years | After 20 years | After 30 years |
|---|---|---|---|
| 0% | $19,672 | $38,697 | $76,123 |
| 0.2% | $19,307 | $37,276 | $71,968 |
| 1% | $17,908 | $32,071 | $57,435 |
| 2% | $16,289 | $26,533 | $43,219 |
Starting from $10,000, at 7% a year before costs and with no tax. The gap between 0.2% and 1% is $5,205 after 20 years and $14,533 after 30.
Most people invest monthly. Try it in the calculator: set a monthly amount and a number of years, then compare a 7% return with 6%, which is the same gain after a 1% annual charge.
Work it out
You invest $200 a month for 30 years at 7% a year before costs. With a 0.2% annual charge you end up with $234,581; with 1% a year, $200,903. How much does the difference cost you, in dollars?
This exercise is in the free account, where we also save your progress.
Create a free accountWhat would you do?
Your bank offers you a fund with a 2% annual charge. The adviser says it “beat the market last year”. What do you do?
This exercise is in the free account, where we also save your progress.
Create a free accountWhat you learned
- You pay dealing commission, the spread, currency conversion and, for funds, an annual charge (TER).
- The TER is taken from the fund’s value every year, without a bill.
- Over 30 years, a 1% annual charge takes almost a quarter of your result; 0.2% takes about 5%.
One more time
The questions you got wrong, asked a different way.
Check yourself
An ETF has a TER of 0.5%. The index it tracks rose by 10% in a year. Roughly how much did the ETF rise?
Roughly 10% minus 0.5% = 9.5%. In practice there are small extra differences, from other costs and from how the fund copies the index.
You reached the end
Keep what you learned
With a free account we remember your lessons, bring back the questions you got wrong exactly when you need them and keep your streak.
Save your progress with a free accountLessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: our calculations, with constant returns and no tax; the monthly example uses the same formula as the calculator (payment at the end of each month, monthly compounding). TERs of UCITS S&P 500 ETFs: justETF’s UK list.