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 graphic is for illustrative purposes only and is purely hypothetical. 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.

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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