The Secret Drag On Your Investments

wealth Apr 01, 2023


If you're a consistent investor, CONGRATULATIONS. That alone is a major accomplishment! If you're not there yet, no worries. Click here to learn how. 

Considering the effort you're putting into preserving and growing your funds, it's important to be aware of any hidden factors that may be depleting your investments.

Unfortunately, such a factor does exist.

It's your investing fees.


What Fees Are You Paying?

Fees come in several forms. The first is related to the investment itself. Each fund you choose has an expense ratio that represents the fund's internal operating expenses. It is represented as a percentage, and can be interpreted as the percentage of your returns that is taken from your account to pay for the fund's fees. 

Not sure what the expense ratio is for the funds you've invested in? Just google the fund's ticker (collection of capital letters representing the fund name). Click the Morningstar link. The expense ratio will pop right up. 

What's a good expense ratio? I prefer <0.10%. Most of my funds are <0.05%.  It is common for actively managed mutual funds to have expense ratios >1%. It's been well studied that actively managed mutual funds fail to outperform their respective index over long periods of time. According to the SPIVA report from early 2022, over 70% of actively managed mutual funds failed to outperform their comparison index in 38 of 39 categories over a 15-year period.

The other key place fees are incurred is with financial advisor fees. Some charge flat fees (by the hour or annually), but it is common to charge an Assets Under Management (or AUM) fee that is a percentage of your total investments. Not that financial advisors aren't valuable, but this will create a drag on your portfolio over time. Avoid any commission based financial advisors, due to the conflict of interest when recommending products. 


Does It Make A Big Difference Over Time?

Let's review a few sample scenarios. Let's assume you are a hard working, diligent investor and decide to invest $20,000 per year from 20 to 50. We will assume the historic stock market return of 10% (for your all stock portfolio), for simplicity. We will ignore taxes in all scenarios. 

Scenario A

If you manage your own money without an advisor and invest in low cost index funds, your balance at 50 is $3.5 MILLION. Yes, millions.

Scenario B

If you invest in actively managed funds, but don't use an advisor, your balance at 50 would be $2.9M. Still a lot, but quite a bit less. I've assumed an average expense ratio of 1% here. I've also given actively managed funds the advantage of assuming the same returns as the index funds, although plenty of studies indicate actively managed funds fail to match their respective indexes over long periods of time (note the SPIVA report data above). 

Scenario C

If you invest in actively managed funds AND use a 1% AUM advisor, your balance drops to $2.5M

The difference between Scenario A and C is $1 MILLION dollars. 

This illustrates the significance of fees over time. If you don't know what your investing fees are currently, now is the time to find out!

Review the resources below if you want to optimize your investing & create work optional status.

As always, invest early & travel often.

- Kristin

Millionaires in Medicine is the fastest growing coaching program to help medical professionals build wealth & create early financial freedom. Click here to learn how to apply. 



Get free money tips & tricks