Low Fees Matter


It is almost impossible to overstate the importance of low fees in investing. A difference of 1% in fees over an investment lifetime can add 10 years of work to retirement. A difference of 2.5% in fees over an investment lifetime can deplete 70% of your retirement savings. You understanding this one simple fact that low fees matter is critical to your financial success: hundredths of a percent matter in financial fees.



This hypothetical illustration doesn't represent any particular investment nor does it account for inflation. It assumes $50,000 is invested into an account that earns 7% a year for 50 years. The y-axis represents total portfolio value net of all fees, while the x-axis represents years assuming a 7% annual return, across three different annual fee rates. Calculations assume fees are paid on an annual basis in arrears based on a percent of the year-end portfolio value. The differences in account values across different fee levels represents both the amount paid in expenses as well as the "opportunity costs"—the amount you lose because the costs you paid are no longer invested. There may be other material differences between investment products that must be considered prior to investing. Investing involves risks. Performance cannot be guaranteed.


When considering why low fees matter, research shows it is ironically fees themselves that drive underperformance of actively managed funds.

Financial advisors are allowed to receive compensation from funds they sell to you as sales charges. Amazingly, this blatant conflict of interest is legal. These may be disclosed in very fine print where you are likely to miss them. Be aware that this is going on, and you are the one paying for it.

"Do you really want to invest in a system where you put up 100% of the capital and as the mutual fund shareholder you take 100% of the risk, and you get 30% of the return?" ~ John Bogle, on mutual funds.

2.5% in aggregate fees may not seem like much, but consider a hypothetical case where your investments return 6% annually over the next decade. This 2.5% would be almost 42% of your returns in the first year! But it gets worse. Because of the compound curse of fees, this 42% won't be making money for you next year, and the following year, and so on. This is how fees compound to erode your retirement savings in a significant way and emphasizes why low fees matter.

"In investing, you get what you don't pay for. Costs matter." ~ John Bogle

The effect of this is a slow grinding away of your assets. You don't want this when you are starting to invest and your asset base is relatively small, as it will face headwinds in growing large. And you don't want this if you are wealthy, as these small percentages equate to huge dollars.

"About the only thing that's changed on Wall Street is that computers have replaced pencils and graph paper. Otherwise, the basics are the same. The investor's need to believe somebody is matched by the financial advisor's need to make a nice living. If one of them has to be disappointed, it's bound to be the former." ~ John Rothchild, Financial Columnist, Time magazine

And now some good news.

We're going to work hard to show you how the low fees you pay us are earned in your portfolio strategy. Here is an example: in recent years, certain index funds that we use have been paying their owners to own them. Their fees are negative. This is due to the fact that active short sellers borrow shares from these indexes and have to pay them. This results in the index fund actually doing slightly better than the index it tracks! This effect doesn't exist everywhere and it may be temporary, but it's a good example of why choosing a large, liquid industry-standard fund can matter.
Read more about this interesting effect.

And more good news.

Take a look at our fees page. We think our low fees fall in the category of refreshingly good news.


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DIFFERENTIATORS
GETTING STARTED
MATERIALS
How Are We Different
Understanding Your Financial Statement
Articles on Investing
Investing with Low Cost Index Funds
Pay Yourself First
About the SECURE Act
Why Use a Fiduciary Financial Advisor?
Financial Planning
Quarterly Booklets
Simple, Low Investment Fees
Investor Resources
Investment Tools
Financial Firm Comparison
The Investment Process
One Day In July in the Media
Local Financial Advisor
How to Switch Financial Advisors
Frequently Asked Questions
Types of Investors
SERVICES
Types of Accounts We Manage
Options for Self-Employed Retirement Plans
Saving Strategies
What to do When Receiving a Pension
Investment Tax Strategy: Tax Loss Harvesting
Vermont Investment Management
How to Invest an Inheritance
Investment Tax Strategy: Tax Lot Optimization
Vermont Retirement Planning
How to Make the Best 401k Selections
Investing for Retirement: 401k and More
Vermont Wealth Management
How to Rollover a 401k to an IRA
Environmental Investing: How it Differs from ESG
Vermont Financial Advisors
How to Invest for College Savings
INVESTING THOUGHTS
Should I Try to Time the Stock Market?
Mutual Funds vs. ETFs
Inflation
The Cycle of Investor Emotion
Countering Arguments Against Index Funds
Annuities - Why We Don't Sell Them
Aim for Average
How Finacial Firms Bill
Low Investment Fees
Understanding Fixed Income: Interest Rate Risk
Investing in a Bear Market
Investing in Gold
Is Your Investment Advisor Worth One Percent?
Active vs. Passive Investment Management
Investment Risk vs. Investment Return
Who Supports Index Funds?
Articles by Dan Cunningham
Does Stock Picking Work?
The Growth and Importance of Female Investors
Behavioral Economics

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(802) 767-7665


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