Markets
vs. Managers
Professional money managers
attempt to outperform markets through market timing
or stock picking (active management). In virtually every
asset class, however, the
consistently superior performer is the market itself.
The largest hurdle
for active managers is cost, which
typically offsets any value they may add. Over time,
high management fees and related expenses can be a significant
drag on wealth creation.
"It's
not a big surprise that 5-star funds have lower costs,
as expense ratios are the best predictor of returns
that we know of." - Morningstar
Consider the following:
Assumed 7% Annualized
Return over 30 Years
|
0.25%
Fee |
1% Fee |
2% Fee |
Start |
$1,000,000 |
$1,000,000 |
$1,000,000 |
5 Years |
$1,386,243 |
$1,338,226 |
$1,276,282
|
10 Years |
$1,921,670 |
$1,790,848 |
$1,628,895
|
| 15 Years |
$2,664,141 |
$2,396,558 |
$2,078,928
|
20 Years |
$3,702,091 |
$3,207,135 |
$2,653,298
|
| 30 Years |
$7,199,674 |
$5,743,491
|
$4,321,942
|
The impact of
fees is extraordinary over time. After 30 years,
a $1 million portfolio growing at a gross annual rate
of return of 7% would be worth approximately $5.74 million
if subjected to a 1% fee. At a 2% fee, the value is
substantially lower at $4.32 million. At a fee of 0.25% and $6,000 maximum, however, the value would be approximately $7.2 million
- a difference approaching $1.5 million vs. a 1% fee and
nearly $2.9 million vs. a 2% fee!
Passively-managed
funds maintain lower fees than the average actively-managed
fund by minimizing trading costs and eliminating the
costs of researching stocks.
Next: Diversification
|
