Difference Between 2% in Fees

 The cost of a portfolio can dramatically impact your overall return in the long run. Let's say that you invest $10,000 per year for 40 years. Lets assume that you can earn 9% on your portfolio year over year for 40 years. In the first situation you are charged 3% of assets under management by an advisor netting 6% return.  In the second situation you are only charged 1% of assets under management by an advisor netting 8% return.

The results are extreme and show how important expenses are to a portfolio.  In the first situation, the individual netting a 6% return ended up with $1,547,620 at retirement. In the second situation, the individual netting 8% return ended up with $2,590,565 at retirement. This is over a 40% difference in a compounding portfolio.   This is why you should pay very close attention to expenses and costs associated with investing. There is very little you can control in a portfolio and your expenses are one of the items you can control.

Opinions expressed on this post are those of the author and may change over time and urge clients to seek professional adviser before making any financial planning or investment decisions. 

Line graph showing the difference of 2% in expenses. Because of a the 2% difference in expenses, there was a loss of $1,042,945.

Active Managers rarely beat the market

According to the 2015 Spiva report, 82% of large-cap mangers, 88% of mid-cap mangers, and 88% of small cap-mangers failed to beat their respective benchmarks in the last 10 years.

Stock picking and active management have been proven inefficient and inappropriate in the long-term. Research shows that active managers rarely beat “The Market,” or their respective benchmarks. When they do, the amount almost never justifies the high fees they charge. That is why taking a passive approach to investing may be easier for most people.  Investing for the long term and ignoring the short term volatility can be a less stressful way to achieve your goals.  Active managers may try to maneuver systematic rick by jumping in and out of the market which can lead to higher volatility.

The founder of Vanguard, John Bogle, has researched the idea of passive investing, his research suggests that passive index funds with low-fees perform better in the long run than portfolios that focus on selecting individual stocks or moving in and out of the market. 

The bar graph below provides a glimpse of how “successful” active managers have been in the last 10 years. 

Opinions expressed in this post are those of the author and may change over time and urge clients to seek professional advisor before making any financial planning or investment decisions. 

Bar graph showing a comparision of the activity of large-cap, mid-cap, and small cap managers. Mid- and small-cap managers both show higher activity.