Quote of the Week: Just Average Investment Fees Can Turn a Top Performing Strategy into a Loser


ETF.com is out with a really good interview with Meb Faber discussing topics from his new book: Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies Topics of the interview include Asset Allocations, the effects of taxes and fees on your investment returns and more.

But what really jumped out to me was his answer to the question:

ETF.com: Would ETFs change that equation if the best-performing portfolio were allocated primarily to low-cost ETFs?

Faber: If you went back to 1972, and picked the best possible allocation in this book, but you implemented it through your average mutual fund—which is 1.25 percent, and/or the average advisor who didn’t invest in the average mutual fund—this is what would happen: You would take what would have been the best-performing buy-and-hold strategy and make it worse than the actual worst-performing strategy in the book. To me, that was a very telling example of how much fees matter in this case.

The whole interview can be found here: http://www.etf.com/sections/features-and-news/meb-faber-fees-taxes-trump-allocation



There are a couple of important points for investors in that answer. The first is the obvious effect of fees on your long term investment returns. Using our Expense Ratio Calculator , we can see what a 1.25% fee does to just a $10,000 investment with additional $1,000 annual contributions over 30 years.


$41,000 in lost growth! Try playing with the numbers yourself for larger investments (say, $100,000) – the results are shocking.

But it also tells me that investors are worrying way too much about “optimizing” their asset allocations, instead of reducing fees. Asset allocation is one of the highest searched topics on Begin To Invest, and understandably so. It’s the “sexy” part of designing your investment portfolio. How smart do you (or your advisor) look when you set up a complicated mix of stocks, bonds, alternative investments, international stocks, etc.? It’s how managers justify their fees, it’s your topic of conversation around the water cooler.

But it turns out, it’s just not that important.

As Mr. Faber said, the performance of even the best investment strategy is ruined by just applying average fees into the mix. So whether you are 20% or 30% international stocks, or 50% or 60% bonds really has a much smaller impact than we would like to admit.

Instead put your time into finding investments with smaller fees – and you will be rewarded much more.

So, do you pay an asset manager 1% per year to determine your proper asset allocation and invest for you? It turns out, their fee is probably offsetting the benefit of their work. Learn to do it yourself. Don’t know where to start? start out with a simple 3 fund portfolio or even more simple – a lifecycle or target date fund (we compare a whole bunch of them in our Fund Spotlight Series here). Type your numbers into our expense ratio calculator and see how much you will be saving by eliminating your investment fees!

Do you pay 1.25% in an active mutual fund to invest in high growth small cap companies? Find a simple passively managed ETF instead, and watch your investments compound even faster.

In a couple days I’m posting a guide on using Motif Investing to “clone” successful active manager’s portfolios, but sidestep the steep expenses associated with those funds. Don’t miss it! EDIT: Post is up here: https://www.begintoinvest.com/want-active-manager-without-expense-ratio-heres-use-motif-investing-copy-favorite-investors-portfolio/

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