Fund Fees Slash Them Early

Post on: 27 Июль, 2015 No Comment

Fund Fees Slash Them Early

Its sometimes hard to impress upon people the impact of fund fees. In a recent Wall Street Journal  article. however, I saw the perfect example sitting about halfway through the piece.

The article isnt about fund fees directly. Rather, it is a good recounting of how investors are dumping active mutual funds for cheaper passive strategies. partly over fund fees but also over a general feeling of discontent regarding performance.

I cant say I blame them. Lots of pro stock pickers warned against investing  in 2012. Yet the S&P 500 Index finished the year up 16% (total return). Oops.

I found more interesting the quote from Kevin Olson, a 26-year-old from Iowa who say he and his wife just put $5,000 into the Vanguard Total Stock Market Fund (VTI). I love VTI, but there are of course reasonable alternatives, such as Schwabs U.S. Broad Market ETF (SCHB).

Olson is an engineer. No surprise there. Money pros know that engineers tend to be the most judicious and least emotional of their clients. All spreadsheets and software and realism about numbers. They also tend to actually retire on time and well.

But the really telling part is that hes young and putting aside a nice chunk of change. I have no idea if thats their entire portfolio or just the amount they decided to move now, or what portion of his or her salaries that might be (nor does it matter).

But $5,000 is impressive. Most young folks would have trouble figuring out where to find $1,000, much less $5,000, to put away right now.

And now is when it matters. Heres the fund fees picture for Olson and his wife:

  • Invests $5,000 and nothing else (doubtful, but lets assume it for this exercise)
  • VTI charges him 0.06% (according to Vanguard)
  • The market returns 7% annually
  • He stays invested 20 years

Result: $19,118

Total expenses, including opportunity cost: $231

I wont run the whole thing again for more expensive funds in VTIs class, but compare that to the category average of 0.30%, and the final number is lower ($18,220) and expenses explode to $1,128.

Interesting enough, but whats really key here is the other number in this story: 26. Olson wont be retiring in 20 years flat. Hell be mid-career.

Put another 10 years on that investment at 7% with the same, low fund fees in VTI, and the total runs to $37,382, while expenses track along at $679.

The true cost of Wall Street fund fees

In the more expensive versions of a total market fund, his return would be lower ($34,781) and fees would rise to $3,281. The difference in the fees is whats astounding, a 383% jump in cost for the same service.

Put another way, using VTI means Olson gets 30 years of investment management at the cost of a desktop computer today.

Just for laughs, lets run that against the typical active mutual fund fee of 1.27%. As you might have figured, its much, much more costly. Olsons $5,000 turns into $25,939 — an okay result.

Meanwhile, total expenses for the active fund over 30 years come to $12,122.  The gap in performance is explained not by poor markets but by fund fees. The active fund manager has kept 32%  of Olsons potential return.

Nice work if you can get it. right? Simply put, your aim as a retirement investor should be to deprive Wall Street of the high fund fees gravy train.

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