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 that “even a broken clock is right 2 times a day.” We at S.E.E.D. 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 in order to have a better chance of achieving long-term investment success. Those principles are: control fees, control taxes, asset allocation, and investor behavior. Today I am going to 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 generally only differ by one percent or less, most people do not realize the compounding effect that small differences can have over time. Just like paying an extra one percent on your mortgage can have a tremendous effect on the dollar amount of interest you pay over your mortgage’s life, one percent more in fees can have an equal effect on your retirement balance.
Let’s look at an example of how different levels of fees can affect projected balances. In our example, we are going to assume you start with $500,000 and that you earn a return of 6% before fees. We are going 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 a half of percent, what’s a half of percent?” You can tell them, “your vacation home.”