One of my core investing beliefs is that EVERYONE can invest on their own. I also believe this can save individuals thousands, if not hundreds of thousands, of dollars. Yet, I realized recently that I’ve never actually laid out the numbers behind that belief. Let’s dive in.
How much will it generally cost you in fees if you invest in an actively managed mutual fund versus a passive index fund? Ignoring the fact that actively managed funds typically underperform, here are some approximate numbers.
VTI has an expense ratio of 0.03%. A modest fee on mutual fund may be 0.5%. That’s a difference of 0.47%. No big deal right?!?
Invest $50,000 for 30 years at an annual rate of return of 8% in both of these funds. What are your costs, including the opportunity costs of fees every year?
0.03% VTI: $4,508.55
0.5% Fee Mutual Fund: $70,245.30
Difference: $65,736.75 or an average of $2,191.23 higher fees per year.
What about working with a financial institution? Chances are they will sell you high-cost mutual funds that underperform, but I’m setting all of that aside.
It costs you 0% to invest on your own. The only cost is your time. If you invest in passive index funds, you likely will spend very little time on investing.
I looked around and found various fee structures within financial institutions, but most charge 1-2% annually. I ran the numbers at 1.25% since few offer something as low as 1% unless you have over $1 million under management.
Start with $50,000 and invest $6,000 per year (maxing out IRA every year) for 30 years. What effect will the fees have on your investment?
Self-managed: $0. YAY! Your time isn’t worthless, but either way, that’s super cheap!
1.25% annual fee at Generic Financial Institution: $286,113 which is an average of $9,537 per year over 30 years.
Total portfolio self-managed: $1,182,832.
Institutionally managed portfolio: $896,719.
The power of compounding is incredible and it works against you when you pay fees based on assets under management. Investing as an individual pays very well over the long-term.
Find the calculators I used here and here.
What’s In VTI?
VTI (Vanguard Total Stock Market Fund ETF) is the one fund that J.L Collins recommends in his book The Simple Path to Wealth. The fund is essentially the entire U.S. stock market all wrapped up in one fund. The fund ensures that you don’t miss any big winners and typically matches fairly closely to the S&P 500. But what actually makes up the fund?
The fund is market cap weighted so it’s actually much more concentrated than you’d think. Check out the two graphics below to see the current make-up of VTI. Want to learn more? Check it out here.
