What are foregone earnings?
Foregone earnings are the difference between what you actually earn on an investment and what you would have earned if fees, sales charges, higher expenses, or lost time had not reduced your return. In other words, foregone earnings are an opportunity cost: money you left on the table because of costs or suboptimal choices that lowered compound growth over time (Investopedia).
Key takeaways
– Foregone earnings = actual return − potential return without fees/charges/time delay.
– Fees and loads (sales charges), expense ratios, redemption fees, and high turnover are common sources of foregone earnings.
– Even small, recurring fees compound into large dollar amounts over decades.
– Reducing fees and avoiding unnecessary charges can materially improve long‑term returns.
Understanding foregone earnings
Fees and charges reduce the base that compounds. Because investment returns compound, even a seemingly small annual drag (for example, a 1–2% higher expense ratio) can produce large differences in portfolio value over long periods. Foregone earnings can come from:
– Sales charges (front-end loads, back-end loads, or commissions).
– Ongoing management fees and expense ratios (gross vs. net expense ratios).
– Redemption fees and short‑term trading penalties.
– Higher trading costs from active management or frequent rebalancing.
– Time costs — delaying investing or withdrawals that prevent compounding.
Examples and the math that shows why this matters
1) Comparing two funds by expense ratio (compound effect)
– Scenario: $10,000 invested, gross market return 7% per year, over 30 years.
– Fund A expense ratio = 0.5% → net return ≈ 6.5% → FV = 10,000 × (1.065)^30 ≈ $66,150.
– Fund B expense ratio = 2.0% → net return ≈ 5.0% → FV = 10,000 × (1.05)^30 ≈ $43,220.
– Difference (foregone earnings from the higher-fee fund) ≈ $22,930 over 30 years.
2) Front‑end sales charge example
– Scenario: $10,000 initial investment, 5% front-end load; cumulative return 7% annually for 30 years.
– Investable amount after load = $9,500. FV = 9,500 × (1.07)^30 ≈ $72,300.
– Without load (full $10,000 invested): FV ≈ $76,120.
– Foregone earnings from the load ≈ $3,820.
3) Time delay example
– Investing $10,000 today at 7% for 30 years → ~ $76,120.
– Investing the same $10,000 starting 10 years later (20 years at 7%) → ~ $38,697.
– Foregone earnings from waiting 10 years ≈ $37,423 (because of lost compounding).
These examples illustrate how fees and timing compound into meaningful dollar amounts.
Common fee types that create foregone earnings
– Sales charges / loads: commissions paid on purchase (front‑end) or sale (back‑end). Breakpoints can reduce load percentages on larger investments (FINRA).
– Management fees & expense ratios: annual percentage taken out of fund assets. Net expense ratio may reflect temporary waivers; gross ratio is the long‑term cost.
– Redemption fees: penalties when units are sold too quickly, returned to the fund to deter short-term trading.
– Transaction costs and turnover: active funds with higher turnover pay more trading costs, reducing returns.
– Advisor fees and wrap fees: paid for advice/administration, often charged as a percentage of assets.
Practical steps to reduce foregone earnings (actionable checklist)
1. Compare expense ratios before you invest
– Look at the net and gross expense ratios in the fund prospectus to understand likely long-term costs.
2. Prefer low-cost vehicles for broad exposure
– Index mutual funds and ETFs typically have much lower expense ratios than actively managed funds with similar exposures.
3. Avoid unnecessary sales loads
– Buy no-load funds or purchase through a platform that waives intermediary loads. Check fund company direct purchase options (FINRA).
4. Use breakpoint discounts if using load funds
– If you must use a load fund, see whether larger investments qualify for reduced sales charges.
5. Watch for temporary fee waivers
– Some funds temporarily lower fees; review the prospectus to know if waivers expire and what the gross ratio will be later.
6. Minimize short‑term trading to avoid redemption fees
– Check the fund’s redemption fee schedule and holding-period rules.
7. Ask for fee transparency from advisors
– Understand exactly what you pay: commission, asset-based fee, transaction costs, or wrap fees. Negotiate or seek lower‑fee advisors when possible.
8. Use tax-advantaged accounts where appropriate
– Taxes are another drag — using 401(k)s, IRAs, or Roth accounts can reduce tax-related foregone earnings.
9. Rebalance efficiently
– Rebalance using low-cost mechanisms (contributions/withdrawals, threshold rebalancing) to avoid unnecessary trading costs.
10. Review regularly
– Annually review fees, fund performance, and whether better low-cost alternatives exist.
How to calculate foregone earnings — simple formulas
– Annual fee drag dollar amount (approximate): Investment × fee%
Example: $100,000 × 1% = $1,000 per year expense.
– Future value with fee: FVfee = P × (1 + r − f)^n where:
– P = principal, r = expected gross return, f = annual fee (in decimal), n = years.
– Foregone earnings over n years = FVnoFee − FVwithFee.
Where to look for fee information (resources)
– Fund prospectus: shows sales charges, expense ratios (net and gross), redemption fees, and shareholder fees.
– FINRA: “Mutual Funds: Fees & Expenses” — explains loads, breakpoints, and common fee types.
– Fund company reports (example: ClearBridge Aggressive Growth Fund shows returns with and without sales charges to illustrate the impact) (Franklin Templeton).
– Fund data services (Morningstar, fund company websites) for historical expense and turnover data.
Putting it into practice — a short plan for investors
1. Identify investment goal and time horizon.
2. Screen funds/ETFs by strategy, then rank by expense ratio and track record.
3. Check prospectus for loads, redemption rules, and gross vs. net expenses.
4. Prefer no‑load, low‑expense index funds or ETFs for broad market exposure.
5. Use tax-advantaged accounts and a low-cost platform or broker.
6. Monitor annually and move to lower-cost alternatives if appropriate (after checking for redemption fees or tax consequences).
Final tip
Always treat fees as a permanent reduction in the compounding base. Small differences compound into large dollar impacts—so reducing ongoing costs and avoiding unnecessary sales charges typically produces one of the largest, most reliable improvements in long‑term investment outcomes.
Sources
– Investopedia. “Foregone Earnings.” (background and definitions)
– Financial Industry Regulatory Authority (FINRA). “Mutual Funds: Fees & Expenses.” (sales charges, breakpoints)
– Franklin Templeton / ClearBridge Aggressive Growth Fund. (example showing returns with and without sales charges)
If you’d like, I can:
– Run personalized foregone-earnings scenarios for your portfolio (enter amounts, expected return, fees, time horizon), or
– Provide a one‑page checklist you can use when evaluating funds. Which would be most helpful?