Impact of Fees on Your Investments
I believe in long-term investing in broad-based, low-cost ETFs and mutual funds.
But why?
A few main reasons:
- I think it’s highly unlikely I can beat the market over a 50+ year investing career, so I want to match the market
- Buying an S&P 500 or Total Stock Market ETF/fund requires no special knowledge, and I believe it gives me the best chance of maximizing my net worth over 50+ years.
- The fees on these types of investments are incredibly low (often just a few hundredths of 1%) and you can easily DIY invest at every major brokerage.
I want to focus on fees today, as it isn’t entirely intuitive just what a difference fees make in your overall net worth.
Aubrey Williams, a longtime member of the ChooseFI community, who runs his “Advice-Only, Fee-Only, Fiduciary at All Times, Hourly Financial Planning for FI” advisory business Open Path Financial, put together a google sheet that show just how impactful fees are on your investments.
He ran a horse race for someone starting with $1,000,000 (the starting point could be anything) and investing for different lengths of time.
In the low-cost scenario, he assumed a 0.05% expense ratio and a 7% annual gross market return, for a net return of 6.95%.
In the financial advisor scenario, he assumed that advisor would charge you a 1% AUM (assets under management) fee and would put you in an expensive mutual fund with a 1% expense ratio.
This took the estimated 7% annual gross market return down to a 5% net return.
Let’s compare the 5% return to the 6.95% annual return when invested for a lifetime:
- After 30 years, you’ve lost 42% of your net worth to additional fees ($3.2 million lost).
- After 40 years, you’ve lost 52% of your net worth to additional fees ($7.7 million lost).
- After 50 years, you’ve lost 60% of your net worth to additional fees ($17.3 million lost).
If you want to check out Aubrey’s spreadsheet, here’s the link. You can click “File” then “Make a Copy” to play with the sheet and change the inputs as you see fit.
Investing is a Two-Step Process
As discussed with Tori Dunlap on Episode 494, one of the biggest errors we see people make is they contribute to their retirement account or move money to their taxable brokerage account and stop there thinking that money is “invested” because it’s in their account at Vanguard, Fidelity, Schwab, etc.
Many times it is just sitting there in cash and isn't invested.
So many people just have the money sit there idle (for years or decades) because they didn’t take the next step and actually purchase investments like an ETF or mutual fund.
Before some sticklers respond saying “but you can do it in one step!” and make the purchase so the cash goes directly into your investment of an ETF or mutual fund:
Yes, some of us do that in one step, but most people don’t unfortunately.
Action step: Review all your accounts and see if you have any cash sitting around that you actually intended to be invested in the market and initiate that transaction to get it working for you!
I previously found I had a few thousand dollars sitting in one of my Vanguard accounts and I promptly made a purchase of VTI to get it invested ASAP.