A 1% fee quietly costs you a third of your retirement

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 1:19:34

   The S&P index, without the fees, beat half the active managers. And over the full decade, it would beat 78% of them. So Jack realized, wait a minute, it's impossible to run an index at zero cost. But at scale, actually, you could approach zero cost. if you just own the S&P then you could beat three quarters of the other mutual funds in the market so there really could be something here. Yeah. This is a really important subtle point. If you are able to pull this off and just own the average of the market, but do it at significantly lower fees than all of the other managers in the market, you will actually have top tier performance. Because if your fee that you are charging your clients is lower than the average fee of the other managers in the market. Well, now that delta between fund returns minus fees is much lower for you. So if you say,

2. 1:20:33

   great, I'll just take the average, but I'm going to actually get the average, you will do much better than most other people in the market. So here's the math to illustrate what a giant difference it is. You might hear, oh, 1% fee, that's not so bad. And at this point, it was actually higher than 1% fee. It was one and a half to two, but let's just say 1%. But that's 1% of the total assets. So if the stock market were to return 7%, but you owe 1% in fees, that's actually one-seventh of your gains that you are giving up, or around 15% of the returns.

3. 1:21:06

   And so when that happens year after year after year, it really cuts out your returns at the knees. And I did a little spreadsheeting just to check the math on this. If you invested $100,000 at age 25, and you got 7% market returns for 40 years, you'd end up with $1.5 million. But if you paid a 1% management fee along the way each year, that's a 6% annual return. Instead of $1.5 million, you end up with $1 million.

4. 1:21:33

   That's an extra 50% for your retirement that you could make by not paying 1% in fees each year. I mean, the long-term impact is that people thought Bogle was sort of this zealot for indexing and he hated active management, but that's not true. He was a zealot for low fees. He always believed that, hey, active managers might be able to outperform the market, but like Samuelson observed, the durability of that is really, really hard to do and consistently outperform for decades. But what is really obvious is even with just a 1% fee, that's a 15% outperformance that every year you're starting with a disadvantage and you got to beat the market by 15% just to break even. Gosh, I'd rather not have that structural disadvantage. That's the thing that is really Bogle's legacy and what he was obsessed with. Yeah. Later in life, Jack would come to call this

5. 1:22:32

   the cost matters hypothesis. And to your example there of an extra half a million dollars in a retirement account or a college fund or even just a savings account, that's why I said at the top of