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.