When it comes to investing everyone has an opinion on the best way to go about it. There are the stockbrokers who always seem to have the best ideas, but never seem to be able to retire themselves. There are the pundits on TV who are always calling for the next stock market crash and claim gold is the only way to go. Well, you know the saying, “a broken clock is right two times a day.” We at SEED Planning Group, LLC believe that focusing on the unknown and what you cannot control is an exercise in futility.
There are four investment principles we believe one should follow to have a better chance of achieving long-term investment success. Those principles are control fees, control taxes, asset allocation, and investor behavior. Let’s focus on controlling fees and the effect that fees have on your long-term performance.
Because investment management fees are usually based on a percentage and usually only differ by a percent or less, most people do not realize the compounding effect that small differences can have over time. Just like paying an extra 1 percent on your mortgage can have a tremendous impact on the dollar amount of interest you spend over your mortgages life, 1 percent more in fees can have an equal effect on your retirement balance.
Let’s look at an example of how different level of fees can affect projected balances. In our model, we are going to assume you start with $500,000 and that you earn a return of 6% before fees. We are going to illustrate what your balance would be in 10, 20, and 30 years assuming a .75%, 1.00%, and 1.25% investment management fee.
|
Year |
.75% |
1.00% |
1.25% |
|
10 |
$844,262.10 |
$823,504.74 |
$803,253.59 |
|
20 |
$1,425,557.01 |
$1,356,320.14 |
$1,290,432.66 |
|
30 |
$2,407,087.53 |
$2,233,872.15 |
$2,073,089.33 |
As you can see, the difference between .75% and 1.25% over 30 years is almost $340,000. So make sure you understand what you are paying and review it every year with your advisor. And if they say “it’s only half a percent, what’s half a percent.” You can tell them, “your vacation home.”
Frederick (Fred) Costantino JR., is a CFP® (Certified Financial Planner), CPM® (Certified Portfolio Manager), CRPC® (Chartered Retirement Planning Counselor) and AIF® (Accredited Investment Fiduciary). Fred serves as S.E.E.D.’s Chief Investment Officer. In this role, Fred provides guidance and technical know-how to S.E.E.D.’s investment committee as he leads S.E.E.D.’s Investment Management Programs. Fred also fills the role of a Wealth Manager, an integral part of S.E.E.D.’s financial planning team, helping to provide valuable financial planning services to our clients.