I've been doing some research on portfolio construction using ETFs and decided to see exactly what impact fees have on a portfolio. The portfolios that I've been testing are very low fee--most of them have a total annual expense ratio of .25%. To illustrate the impact of fees, I ran annual compounding rates of 10% and included different levels of fees over a 50 year horizon.
The results are staggering. Wall Street has a dirty little secret and it's that Wall Street is designed to make firms money first and customer's money second. Kind of like the classic book by Fred Schweb, Where Are The Customer's Yachts. Given that the book was originally published in 1940, this secret isn't anything new, it's just that the industry wraps up the fees/commissions in new products and gives it a new marketing spin. Whether it's called a management fee, an administration fee, a commission, a surrender fee, a front-end load, a deferred load, a 12b-1 fee, or an "other" (yes, I've seen a statement that said "other" next to the fee), it's all a way of making the firm money and slowly and quietly charging the client. It happens more than most people think and most individuals are in products that have fees baked into the product that have other fees on top of them--for instance, the mutual fund fees that are inside a variable annuity that has its own fee. Yes, most people reading the blog are not likely to have variable annuities in their portfolios, but tons of individuals have them and they usually don't even understand that it's an annuity platform and that they are getting fee'd to death. Enough of my rant..let's look at the numbers.
Here's a table that shows a portfolio starting with $10,000 that is compounded annually at 10% with the annual fees taken out.
Here's a graph of the results.
Here's a graph of the first 20 years zoomed in. This is helpful for those that say it's too late, that they only have another 10-15 years before retirement...look, it still costs thousands and thousands of dollars.
So what is the solution? Obviously, replace your mutual funds with low cost ETFs. If your comfortable with it, replace your financial advisor with low cost ETFs. There's no sense in having an advisor tack on another 1-2% on top of the fees just to put you in the product and re-balance it for you if you're able to do it yourself. Some people like the help and want an advisor and I understand that, but many do not need it.
If you're interested in learning more about ETF portfolios, there are plenty of great online resources and books to learn from. Look at John Bogle's book, The Little Book of Common-Sense Investing, or Mebane Faber's The Ivy Portfolio--both are great places to get started.
I hope everyone has had a great weekend.
TLT
The results are staggering. Wall Street has a dirty little secret and it's that Wall Street is designed to make firms money first and customer's money second. Kind of like the classic book by Fred Schweb, Where Are The Customer's Yachts. Given that the book was originally published in 1940, this secret isn't anything new, it's just that the industry wraps up the fees/commissions in new products and gives it a new marketing spin. Whether it's called a management fee, an administration fee, a commission, a surrender fee, a front-end load, a deferred load, a 12b-1 fee, or an "other" (yes, I've seen a statement that said "other" next to the fee), it's all a way of making the firm money and slowly and quietly charging the client. It happens more than most people think and most individuals are in products that have fees baked into the product that have other fees on top of them--for instance, the mutual fund fees that are inside a variable annuity that has its own fee. Yes, most people reading the blog are not likely to have variable annuities in their portfolios, but tons of individuals have them and they usually don't even understand that it's an annuity platform and that they are getting fee'd to death. Enough of my rant..let's look at the numbers.
Here's a table that shows a portfolio starting with $10,000 that is compounded annually at 10% with the annual fees taken out.
Here's a graph of the results.
Here's a graph of the first 20 years zoomed in. This is helpful for those that say it's too late, that they only have another 10-15 years before retirement...look, it still costs thousands and thousands of dollars.
So what is the solution? Obviously, replace your mutual funds with low cost ETFs. If your comfortable with it, replace your financial advisor with low cost ETFs. There's no sense in having an advisor tack on another 1-2% on top of the fees just to put you in the product and re-balance it for you if you're able to do it yourself. Some people like the help and want an advisor and I understand that, but many do not need it.
If you're interested in learning more about ETF portfolios, there are plenty of great online resources and books to learn from. Look at John Bogle's book, The Little Book of Common-Sense Investing, or Mebane Faber's The Ivy Portfolio--both are great places to get started.
I hope everyone has had a great weekend.
TLT
1 comment:
I have been preaching this very philosophy to numerous friends and family members and actually put a set of graphs together that illustrate the exact same thing. That "tiny" expense ratio will erode your gains over the short and long term. I would also recommend the "The Little Book of Common-Sense Investing".
Regards,
Russell Greco
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