You may be familiar with the parable of the rice and the chessboard. The story goes that a wise sage outwitted a powerful emperor and was rewarded with a prize of her choosing.

The sage asked that the emperor reward her with rice.

She was to receive one grain of rice the following day, representing the first square on a chessboard. On each subsequent day, the emperor would double the number of rice grains for each remaining square on the chessboard.

While the rice payment seemed small initially, the compounding meant that the Emperor owed over a million grains of rice by the 21st day, over a billion by the 32nd day, and ended up with a debt of more than a trillion grains of rice.

In the same way, compounded investment returns can be severely eroded by seemingly small investment management fees charged each and every year. This has never been a more pressing issue than in today's lower return environment, which is expected to endure for some time.

Low returns are here to stay

Vanguard's 10-year return forecast is for equity markets to average between 7 and 9 per cent per annum, and bond markets to average between 2 and 2.5 per cent per annum.

This is a sizeable downward shift from the average returns enjoyed over the last three decades, when equities averaged 10 per cent a year and bonds 9 per cent.

A solid return, however, is still available to those investors who exercise investment discipline over the course of multiple market cycles. Consider a typical balanced fund investor with 70 per cent invested in shares and 30 per cent in bonds. On average, we would expect this portfolio to garner a potential annual return of around 6 to 8 per cent.

However, these forecasts assume an investor gets to keep every dollar they harvest from the market. But we know this isn't realistic. The real-world impact of taxes and investment management costs reduce the returns that an investor gets to keep.

Investors do have some control over the taxes they pay on gains and earnings. For instance, holding investments in the most tax-efficient manner – like maintaining a position for the long-term rather than switching allocations regularly for a more efficient approach to realising capital gains – can minimise the drag from tax. The biggest controllable for investors, however, is how much they pay in investment fees.

Pay less, keep more

The return an investor earns from the market is uncertain – it varies from month to month, year to year, and has an uncertain impact on wealth.

The impact of fees on wealth, however, is certain. In most cases we know with absolute clarity how much an investment manager will charge us every year over the life of an investment.

Fortunately, we can control which investment vehicles we use, and therefore what impact fees will have on our returns.

For many investors, 1 per cent in management expenses on an investment with a potential return of 9 per cent a year might not seem unreasonable. But by reducing fees by half a per cent a year, an investor can keep more of the market return their portfolio earns each and every year.

In this context, choosing an investment vehicle should not only take into account potential returns and your appetite for risk, but also its cost, both in terms of fees and tax efficiency.

You may be familiar with the saying that when it comes to investing, you get what you don't pay for.

Although low-cost investing has been particularly ascribed to index-style management in recent years, it applies equally to active management, where high cost does not guarantee consistently high returns. In fact, our research shows that higher expense ratios are generally associated with lower excess returns for both active and index funds.

So, is a saving of "just" half a per cent a year really that meaningful?

Replace compounding costs with compounding savings

Consider a 25-year-old, Maddie, who invests $5000 every year. She faces a choice of investing in a fund that charges 1.07 per cent per annum, which according to Morningstar is the average managed fund fee for all Australian equities funds as at December 31, 2015, or an equivalent low-cost fund which charges 0.25 per cent.

Assuming the two products generate the same level of returns, by age of 40, if she chose the low-cost fund, Maddie has saved more than $8000 in unpaid fees – a modest boost to her growing nest egg. A meaningful amount, for sure, but not something to shout about. Not yet.

By the time Maddie is 50, the saving has increased to $32,000 – a more noticeable amount, particular when she compares it to accumulated market-average fees.

By age 60, however, things are getting serious. The low-cost approach has saved her more than $90,000 compared to the market average fee schedule.

The relatively simple decision to invest in a low-cost fund has potentially allowed her to retire a year early.

For a portfolio many times the size – for instance retirement savings in a self-managed super fund with two trustees – the benefit from compounding over the long term would be more substantial. In this example the outcome isn't just wealth creation, it is the potential for many additional years of self-funded retirement.

Unlike the emperor, most of us are savvy enough to avoid paying fees that compound daily at 100 per cent. But even seemingly small differences in costs, sustained over a long period of time, can have a large impact on your wealth – especially as we look toward a decade of lower returns that will put pressure on portfolios of all shapes and sizes.

Scott Pappas is an investment analyst in Vanguard's global investment strategy group.