Foregone Earnings

Last updated on 2023-09-26 13:58:58

Foregone earnings represent the difference between earnings actually achieved and the earnings that could have been achieved with the absence of fees, expenses, or lost time. As such, a large portion of foregone is represented by the amount that the investor spent on investment fees, which often make up a sizable percentage of investment earnings.The assumption is that if the investor had been exposed to lower fees, they would have automatically earned a better return. The concept of foregone earnings is typically used when referring to sales charges, management fees, or total expenses paid to funds.

Definition: Lost earnings represent the difference between the actual realized earnings and the potential earnings that could have been achieved without fees, expenses, or time costs. In other words, it is the potential earnings that investors miss out on due to paying various fees.

Origin: The concept of lost earnings originated from the focus on investment fees. As financial markets developed, investors became increasingly aware of the impact of various fees on their final returns, leading to a focus on reducing these fees to maximize earnings.

Categories and Characteristics: Lost earnings can be categorized into the following types:

• Sales Fees: Fees paid when purchasing and redeeming funds.
• Management Fees: Fees charged by fund management companies.
• Other Fees: Such as transaction fees, account maintenance fees, etc.

These fees directly reduce the actual earnings of investors, so understanding and minimizing these fees is crucial for improving investment returns.

Specific Cases:

1. Assume Investor A invests in a fund with an annual return of 8% but has to pay a 2% management fee each year. The actual return is 6%. Without the management fee, Investor A's earnings would be higher.
2. Investor B buys a no-sales-fee index fund with an annual return of 7%. In contrast, another similar fund has a 1% sales fee, resulting in an actual return of 6%. By choosing the no-sales-fee fund, Investor B reduces lost earnings.

Common Questions:

• How to calculate lost earnings? Lost earnings can be calculated by comparing the returns before and after deducting fees.
• How to reduce lost earnings? Choosing low-fee investment products, such as index funds or ETFs, can effectively reduce lost earnings.

The above content is a further interpretation by AI.Disclaimer