Be wary of small percentages, they add up! You may think that 1.5% a year in management fees is not a lot to pay for a product, but with passive investing you can pay just 0.2% a year in management fees. Let’s see how this impacts you over a working lifetime: Historically you should expect 9% returns on your combined portfolio over a longer period of time.
So this example above from the moneychimp calculator shows that you should expect to see $1,194,118 from your investment over 25 years if you started with 10K, and added another 12K a year. Not bad at all! (By the way if you left it in the bank, you could expect that figure to only be about 310K based on the current record low interest rates – you’ll be eating cat food for your retirement if you can even afford that!). Now let’s see what happens when we subtract 0.2% from that.
So already you can see a $38K loss here compared to the full 9%. This is peanuts to what you’ll see next though:
This is at 1.5% of management fees. Now you’re down $256K. If we go down to 2.5% of fees it obviously goes downhill fast, and this is still being generous. You’ll be shocked to see that many of these actively managed funds have fees within fees within account management charges to that point it may end up being up to 4% a year!
$393K down just because of some smooth talking sales person! That’s 32% less than what you could have had. Let me give you some more examples. $3200 a month is what it takes to reach the Zurich Vista ‘gold’ plan or whatever it’s called. You’ll get all these “bonus” units up front which will make it look like you’re doing really well the first couple of years, and then eventually you’ll start to see the sad state of affairs…
$3.32m, not bad! Let’s see what happens once it becomes Actively managed…
$2.25m, hang on. Are you seriously telling me that just because I let some so called expert manage my money, I have walked away from $1.07 million dollars! Yes!!! These examples are also best case in the sense that it does not calculate for annual additions that you may make to your retirement fund. Those will add up significantly in your favour but those seemingly small percentages being deducted will rob you of your full potential. In the last example, I just lost out on a Ferrari for my retirement! Once I figure out how I’m going to link to a couple of Excel spreadsheets that I have come up with that will give you some additional tools to play around with.
Don’t get fooled! #4 – How to allocate your ETF holdings