In April I contributed a piece to Yahoo that discussed the eroding impact of fees on the performance of an investor’s portfolio. I wrote:
Consider the Department of Labor’s analysis of 401(k) investment fees: An individual with a 401kbalance of $25,000 has 35 years remaining until retirement. That individual pays an investment management fee of 0.5 percent (a conservative assumption) and earns 7.0 percent per year (a reasonable assumption). At the end of the 35-year period and assuming no additional contributions (unlikely and, therefore, conservative), the balance will grow to $277,00.00. However, increase the fee to 1.5 percent (somewhat aggressive), and the account balance grows to only $163,000–or $114,000 less than the portfolio paying the lower fee. According to the DOL, that one percent higher fee compounded over 35-years reduces the ultimate account balance by 28 percent. Fees, it seems, make a difference.
I cite that passage here because the importance of fees paid by investors for investment management related activities cannot be underestimated or overlooked. As a former professional investment manager I collected similar fees on the assets I managed for my clients. Obviously, I am not condemning the payment of fees. If you hire the right manager and they provide performance well in excess of the market they have earned their fee and you, as a client are much better off. However, if the manager does not exceed the performance of the market by at least the annual fee charged (and according to NerdWallet only 24% of active investment managers have consistently done so over the last ten years) then the DOL’s analysis should alarm you.
Consider fees carefully. Saving 1.5% per year is as good as earning 1.5% per year.
I recently came across a study conducted by InvestingNerd entitled: “InvestingNerd Study Finds Americans Have A Low IQ When It Comes to Online Investing.” (You can read the article in its entirety at www.nerdwallet.com )
The study summarizes the results of a poll recently conducted by InvestingNerd. The staggering lead statistic revealed that four in five Americans could not correctly identify a brokerage account as the proper account to open for stock investment. Alone that result is shocking. But what struck me was their finding regarding the lack of attention paid by the majority of 401k holders on the eroding effect of fees.
For example, InvestingNerd found: “9 in 10 Americans (92.6%) underestimated the 401(k) fees the average household will pay over a lifetime by several thousand dollars. The real average totals over $150,000 per household” (emphasis mine). Long a personal pet peeve, fees are one of the greatest enemies of total return. If you consider that according to the Employee Benefit Research Institute only 24% of Americans report retirement savings in excess of $100,000, average lifetime fees of over $150,000 should matter–a great deal–to every investor.
Frequent readers of this blog know that I am passionate about educating individuals on investing. In fact, that passion is the primary reason I am writing THE INTELLIGENT WOMAN’S GUIDE TO STOCK INVESTING. InvestingNerd puts numbers to the concerns inhibiting most from investing. Their results show: “Just over a quarter of those not currently investing online say they don’t invest because of either uncertainty on how to get started (13.6%) or not wanting to risk losing money (12.8%). Meanwhile, 39.3% say they do not invest because they do not have enough money to do so” (emphasis again mine).
A brokerage account can be opened with as little as $2,000. And fee-sensitive, sound investments can be made via exchange traded funds (ETF’s). Next blog post I will suggest some on-line investing platforms and low-fee ETF’s for your portfolio.
In the meantime: get busy Saving so you can Invest sensibly for the long-term.