You can see some of your investment costs on your account statements. Other costs are less easy to see, and may take you by surprise.
Five hidden costs for investors
1. Lost interest: Many bank accounts require a minimum account balance. If your balance dips lower, even for a day, you will lose interest or have to pay fees. That’s the bank’s way of covering the cost of running your account.
2. Penalties if you cash out early: Some investments charge a penalty or fee if you cash them in early. For example, some mutual funds charge a short-term trading fee if you sell before a certain date. Likewise, if you buy a Guaranteed Investment Certificate (GIC) for a set number of months, you may pay a penalty if you sell early.
Example: Let’s say you buy a $20,000 two-year GIC. It pays 4% a year. After one year, you cash it in to cover a family emergency. By selling early, you give up $800 in interest for the year, and you may have to pay a penalty. You can sometimes avoid these costs by choosing more flexible GICs. For example, there are redeemable GICs you can cash in any time, but the interest rate is usually lower.
3. Fees when you sell or transfer an investment: Some mutual funds charge you a fee only when you sell, not when you buy. This fee is called a back-end load or deferred sales charge.
Example: Let’s say you invest $20,000 in a mutual fund. A year later, it’s worth $22,000, so you’ve made $2,000 (a 10% return). If you sell, you’ll pay a 6% fee for cashing in early. You get to keep just $680 (a 3.5% return).
4. Taxes withheld from sheltered plans: When you put money in a tax-sheltered plan like a Registered Retirement Savings Plan (RRSP), you don’t pay any tax on your savings until you take money out of the plan. If you withdraw money, the government will withhold the tax you owe. If your income tax rate is high, your tax bill could be high, too.
5. Lower bond prices: Bond prices go up and down according to interest rates, unless you hold them until they mature. If you sell a bond early, you may find that its price has dropped, and you will lose money.
Remember: Sometimes the costs of buying and selling aren’t obvious.
Think carefully about how you want to invest your money, because you will pay costs if you change your mind.