Thu Oct 10 2024, by Tyler Gardner
Understanding the Importance of Investment Costs
If I could only teach you one thing about investing, it would be that cost matters way more than your annual return. And here is exactly why.
Who Am I?
I'm Tyler, a former financial advisor and portfolio manager, now dedicated to creating valuable financial content for free, so you don’t have to pay for it.
Cost Comparison: Investor One vs. Investor Two
- Investor One: Pays a financial advisor 1%. Additionally, without knowing, they incur about 1% in commissions to get into fancy mutual funds, along with another 1% fee just to be in those mutual funds. They also face a 0.5% portfolio turnover fee due to active management throughout the year, and a cash drag of 0.15% because the advisor is waiting for the right time to enter the market. This sums up to a total fee of 3.65% annually, regardless of performance.
- Investor Two: This investor has been following my channel and knows how to invest in low-cost index funds that track their desired indexes for just 0.02% annually. They incur no commission fees, no turnover fees, and no cash drag because they understand that timing the market isn’t as critical as spending time in the market.
The Results After 30 Years
After 30 years of investing, Investor One's initial $100,000 has grown to a healthy $661,000, whereas Investor Two's initial $100,000 has dramatically increased to over $1.65 million. That million-dollar difference went somewhere—too bad it wasn’t to Investor One.
Final Thoughts
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