I was 26 and we had just loaded up on debt to buy our family home. Despite a daunting mortgage payment, I was determined to start investing. I had been introduced to the wonders of the stock market for long term wealth creation by a now out-of-print book from the Motley Fool (for similar inspiration I would now recommend The Simple Path to Wealth by J L Collins).
The book laid out the case for investing in low-cost index trackers beautifully and off to the bank I went to setup my first monthly automated investment. I am very grateful to my past self for that day. 14 years later we had paid off our mortgage and were financially independent.
Choosing the correct path
I knew I was on the right track when the bank’s adviser flatly told me that they did not offer index trackers and tried to steer me towards their (much more expensive) active funds. They were a bit taken aback when I flourished the details of the bank’s index tracker I wanted to invest in. The meeting didn’t last long after that. They said I would have to apply online for an index tracker; I’m guessing there was no commission for selling passive tracking funds.
Since then I have been aware that fund charges have a big impact on returns; just how much impact they have, over the long term, is still shocking.
Recently I got the chance to move my retirement savings into investments with lower fund charges (from 0.27% down to 0.10%) and I wanted to find out exactly how much this move would save me. I already knew that fund charges mattered – a lot! I still wasn’t prepared for just how much money gets eaten by even seemingly small charges.
To keep things simple we will compare funds with the same starting amount ($250k), the same rate of return (7%), over the same number of years (20 years).
Check out these shocking numbers …
2% fund charges
$250,000 – 7% return – 20 years
Resulting amount = $663,320
Total lost to charges = $304,090
1% fund charges
$250,000 – 7% return – 20 years
Resulting amount = $801,785
Total lost to charges = $165,625
0.5% fund charges
$250,000 – 7% return – 20 years
Resulting amount = $880,904
Total lost to charges = $86,506
0.25% fund charges
$250,000 – 7% return – 20 years
Resulting amount = $923,201
Total lost to charges = $44,209
0.1% fund charges
$250,000 – 7% return – 20 years
Resulting amount = $949,495
Total lost to charges = $17,915
0.05% fund charges
$250,000 – 7% return – 20 years
Resulting amount = $958,424
Total lost to charges = $8,986
You could save $100,000s
Moving from an actively managed fund (many have charges in excess of 1%) to a well priced passive fund (with < 0.1% charge) could save you the price of an apartment in the mountains over 20 years.
I almost couldn’t bring myself to add in the amounts for a 2% fund charge, but then I did a quick search for some active funds, and there are plenty out there that will charge you 2% per annum plus take 5% up front as well!
Fund charges matter to your wealth … a lot!