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When it can be worthwhile to pay more for an investment

by , 24 November 2014

One investment rule you'll have heard time and time again is buy low, sell high. This makes perfect sense and reduces your risk when investing.

But there are exceptions to every rule. And sometimes is can benefit you to pay more.

So how does this work?

Let's take a closer look…

When you should consider paying more to invest

When it comes to investing in unit trusts, you might base your selection on the fees a fund carries.

For example, you invest R100,000 in a fund with a 1% management fee. Over 20-years, the fees add up to almost R28,000. Quite a sizeable sum and clearly impacts your return.

But if performance is good, paying more in management fees can make it all worthwhile.

There are many market participants who push investing in passive funds as opposed to actively managed fund. They believe that over the long-term you can’t beat the market, Keith Fitz-Gerald in Total Wealth explains.

Yet, many investors, including Warren Buffett and Sir John Templeton, consistently outperformed the market.

When investing in unit trusts, you need to keep an eye on fees. They can be costly. But you shouldn’t dismiss paying more in fees if you get more performance for that.

Why paying more in fees can pay off

A recent study of funds in the US showed that of 18,000 funds, the ones with the cheapest fees hardly made an appearance in the list of top performers.

The study showed that funds with high fees did remarkably well in comparison to their lower fee charging counterparts when ranked according to performance.

If you come across a unit trust with high fees and it looks like it may be worth it, ask yourself:

  • If the fund manager can prove he’s worth it?
  • And are you looking for a specialised investment for a specific part of your portfolio?

When faced with such a decision, you have to decide whether a fund with lower fees is worth the savings. Or if you’re better off looking at a fund with higher fees with a far better chance of growing your money.

So there you have it, when it can be worthwhile to pay more for an investment.

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When it can be worthwhile to pay more for an investment
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