I read an article on CNBC that discussed how Warren Buffet dedicated four pages of his 29-page annual report criticizing active fund managers. Buffet’s reasoning for slamming active fund managers is due to the high fees these folks charge. The fees are often 1% or more of the funds they manage. At one point, Buffet compared these active fund managers to monkeys!
In contrast to active fund managers, you could go to Vanguard or Fidelity and invest in a total stock market index fund that has an expense ratio of 0.1%. You almost save a full percentage point, which compounded over 30 years can really start to add up. Low-cost index funds are also what Buffet recommends. In his will, he writes that he wants the investments invested in low-cost index funds for his wife.
Why do so many people fall victim to active fund managers?
Companies that employ active fund managers make A LOT of money and they can afford to market to folks like you and me. It reminds me of the tobacco industry. They both market toward young people and generally once they have them hooked – they are unfortunately hooked for life.
My post last week reviewed my $19,000 whole life insurance policy mistake. I was sold by a salesperson on this policy when I was in college. I didn’t know jack about personal finance then.
However, if we all continue to read and learn from each other’s mistakes, we can try to stop these companies from taking our money!!
1% doesn’t seem like that much?
If you’ve read two of my recent book reviews, you would see the parallels in investing strategies to what Buffet is describing – investing should be boring and NOT done with active fund managers. Also, keep it simple stupid (KISS)…
Both the 99 Minute Millionaire and The Smartest Investment Book You’ll Ever Read argue that low-cost index funds are the vehicle to use for investing – they both strongly oppose active fund managers.
If you’ve seen my post on how you can become a millionaire by solely investing in a Roth IRA over 30 years, what I didn’t talk about is fees. Let’s say you are charged 1%.
A $5,500 contribution each year for 30 years equates to over $1 million with a 10% return. If you are charged 1% fees over the same 30 year period, you would have paid almost $93,000 in fees.
Compare that to some of Vanguard’s low-cost index funds that have charge one-tenth of that (0.1%) – you would only pay around $10,000 in fees and you would likely get a better return! AND, you would save over $80,000!
I just ran a quick calculation on the numbers in my 401(k). If I get charged 1% for management fees, which is close to what I get charged in my 401(k), and I continue to max out my 401(k), I will pay a total of $30,840 in fees over the next 10 years.
How to take action
Take time to look into the fees you are being charged on your investments. I know Personal Capital offers some features that analyze the fees in your investments. I wasn’t able to get Personal Capital running because they don’t support my company’s 401(k) provided, so I can’t provide a comprehensive overview.
If you can’t use Personal Capital, either manually go into your account and look at your statement to see the fees you are being charged. Or, go directly to the company that manages your investments and ask for a breakdown. If the person you talk to says they can’t share that information – ask for their manager. They have to disclose what they are charging you!
Once you understand what you are being charged, look for lower-cost options. For me, I was able to basically build my target 2050 fund with Admiral Vanguard shares. Admiral shares are lower-cost shares Vanguard offers. For my Roth IRA and my wife’s Roth IRA, we moved away from American Funds. American Funds was charging 5% on each contribution we made.
Last week, I read two awesome articles that discuss fees. One by Liz over at Chief Mom Officer, and one by Financial Panther (FP).
Liz actually has some good options in her 401(k). The S&P 500 Index has a good return and the cost ratio is very low. However, Liz had a stat that still baffles me. Almost 40% of people at her company are invested in a fixed income fund. Unless there are a significant number of people close to retirement, or these people are extremely risk-averse, these people are not investing to get a good return!
FP’s article discusses the four reasons why people invest in expensive funds.
– Someone told you to invest that way
– Selecting funds based on the brand name
– Thinking administrative fees are the only fees that you pay
– You think you can beat the market.
FP suggests investing with a company like Vanguard or Fidelity too. It is easy to get started with Vanguard or Fidelity, and they offer very low-cost index funds to invest in.