funds of funds
cost matters

Cost matters, everyone will agree, and then promptly forget about it as soon as the words have left their mouth. Why bother, as we are talking "only" percentages. Why such a fuss about such minor things as fund costs, hidden somewhere deep in the small print of an obscure prospectus, and running as high as maybe “only” 1.5%? Why should such a insignificant thing actually be part of my decision which instrument to use? After all, even if I choose prudently, I might only safe 1% a year:

One might say that 1% is not much of a difference, especially during bull markets such pittances are readily overlooked.

Following a chart that shows the above-mentioned difference.
Consider taking CHF10`000 which you invest in an average actively managed mutual fund covering European large cap companies, costing a mere 1.5% per year in management fees. (blue line)
As a comparison you put your money in a index based fund that covers the same asset class, costing slightly less at 0.5% (green line).
We calculate a return of 4% per year, after inflation:

developement of 1% difference in performance possible growth of CHF 10'000 over 30 years, active versus passive investment



After the 30 years your chosen fund manager returns slightly less than CHF 21'000 to you. Not bad you might think.
But consider the more than CHF 28'000 you would have gotten with no manager at all. Too bad, eh?
And the above example makes a rather optimistic assumption in as much as the fund manager probably won't be able to even match the index. (see zero sum game)

Also we ignored such niceties as the fact that you most likely will have to pay someone to keep your account, (maintenance fees) or any other hidden or openly visible costs you might occur like postage of confirmation letters or fees for phone brokerage or cash drag or...

Some of these costs hold of course true for both active and passive investments, diminishing expected returns even further.
But the smaller the returns are the more the difference hurts.