Monday, December 15, 2014
"[It's] the equivalent of climbing Everest in flip-flops and a tank top. You were dead before you got started..."
Self-help guru Tony Robbins just published a book about personal finance and investing. Tony took a great approach to the book. Like we often do at Stansberry Research, he turned to the world's greatest traders and investors for their perspectives on what works in the market. He interviewed legendary money managers like Warren Buffett, Carl Icahn, Paul Tudor Jones, and Ray Dalio.
There are a lot of useful insights from these investment masters in the book.
But one of the book's strongest chapters covers a GIANT threat to returns... it's a threat that might be holding you back right now... and it could drastically reduce the quality of your retirement.
The threat? High fees.
We all intuitively know that paying high fees for any service will eat away at your wealth. But what you probably don't know is just how much money is being taken from you in your 401(k) or IRA. And you probably don't know what the real, hidden costs of many mutual funds are. If you learn what's going on, and take steps to reduce these fees, it could save you incredible amounts of money.
As Robbins put it, this idea can "put hundreds of thousands, maybe even millions, back in your pocket." Get this right, and you can retire when you like... Get it wrong, and work an extra 10 or 15 years.
According to Forbes, the average cost of owning a mutual fund is more than 3% a year... And more than 4% if you're holding it in a taxable account or an expensive 401(k) plan.
"Not my funds," you're probably thinking. "I checked. They cost me less than 1%." But all you're seeing is the expense ratio... the cost of marketing and management. Forbes listed five other types of costs and fees you're paying, including brokerage commissions and transaction costs.
Now, 3% might not sound like a lot. But as regular readers know, even small yields can add up to big money over time... especially when you're buying champion dividend-raisers and reinvesting your dividends. But when you're paying those small yields, time works against you.
Here's a version of the chart Tony published to prove the point... The chart plots the returns of three people who invested $1 million for 30 years, but with different fee structures. As you can see, someone paying 1% annual fees ended up with 76% more money than someone paying 3% annual fees.
The solution here is to avoid actively managed mutual funds – funds that try to beat the market by picking which stocks to buy and sell. All that trading and research pumps up the fees you're paying...
And you're likely not getting much for your money.
One study showed that from 1984 to 1998, only eight out of 200 fund managers beat a fund tracking the broad S&P 500 index. You had a 96% chance of underperforming the market... and paid big fees to do it.
The first thing to do is figure out what sorts of mutual funds you own now. Ask your broker where to find information on the fees you're paying to own these funds. And remember, the "expense ratio" doesn't tell you everything. There are trading costs and other expenses you'll never see. (Be especially careful of buying "load" funds that require you to pay costs upfront.)
If you discover you're in a high-cost, low-quality mutual fund, consider a low-cost market-tracking fund instead.
Tony mentions the Vanguard family of funds, which offers funds that cost between 0.05% and 0.25% "all in." If you can purchase exchange-traded funds (which are generally cheaper than mutual funds), the low-cost SPDR S&P 500 Fund (SPY) is one of the biggest and most popular. Its expense ratio is 0.1%. But keep in mind, you'll pay commissions to buy and sell ETF shares.
Check your 401(k) today. Check your IRA. If you're using a financial advisor, check to see if they are putting you in low-cost funds. If you own expensive, underperforming mutual funds, make the change today. Don't wait. The long-term effect of eliminating just 1% per year in fees is huge.
As Robbins put it, getting this right could mean "the difference between teeth-clenching anxiety about your bills or peace of mind to live as you wish and enjoy life."
Which would you rather have when you're ready to retire?
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