making complexity simple
As a follow up to my previous post about mutual fund picking, here is my comparison tool that makes it easy to visualize the potential difference in gains/loses over the long-term.
Don’t forget to check out Tony Robbin’s books, where this concept is covered in more detail!
Over the years, I’ve acquired a few 401k accounts including one with Fidelity, Vanguard and USAA. I have always taken an interest in investing. There is certainly no shortage of advice out there and it is perhaps a bit challenging to learn the tricks of the trade within the confines of a 401k account.
You might think that it’s simple… just look at the short-term and long-term returns of a fund, right? Pick the one that has the highest returns. You might even think that you could just look at the Morning Star ratings of your available mutual funds and pick the one with the best rating. You might be fooled though…
The finance industry has found many ways to make as much money as possible from their clients – not the least of which is by creating confusion. How do you pick out the most important facts about a fund when there are pages of dollar signs and percentages to sift through? Below, I will provide a simple way to pick the funds that will likely give you the greatest return.
Recently I read “MONEY Master the Game” by Tony Robbins and currently I’m reading his new book, “Unshakeable“. In both of them, he illustrates how mutual fund fees are a long-term killer of returns. Interested in improving my own returns, I did a study of all of the available funds in my 401k accounts. The results were somewhat surprising to me so I’ll illustrate just one example using a fund from my Vanguard account, one from my Fidelity account and investing a hypothetical $10,000.
| Starting Portfolio Value | $10,000.00 | Difference | |
| Investment | Fund 1 | Fund 2 | |
| Average Annual Return | 7% | 7% | 0.000% |
| Expense Ratio (fees) | 0.10% | 1.075% | 0.975% |
| Effective yearly return (after first year) |
6.9% | 5.93% | 0.975% |
In the example above both funds reported an average return of 7%. What this actually means is that Fund 1 had to make 7.1% in order to pay you 7%. Likewise, Fund 2 had to make 8.075% in order to pay you 7%. That’s a difference of almost 1% extra that the fund has to make in order to keep up! Compound the expense difference over 30 years and let’s see what you get…
| Investment | Fund 1 | Fund 2 | Difference |
| Portfolio Value After 30 Years | $74,016.95 | $56,228.20 | $17,788.75 or 31.64% |
So… after 30 years you could have made an extra 31% on your money just by paying attention to what might seem like a small difference in the fund expense ratio (fees).
Returns = Gains – Expenses
For more mind-blowing info, I highly recommend Tony’s books as well as this write-up from Vanguard.
Do you use any other (potentially better) techniques to select funds? I’d love to hear from you! Leave a comment below!
P.S. Watch for my next post which will include a tool for running these calculations for yourself!
Here’s a quick talk about amortization and how it affects the interest curve of a loan…
If you are interested, here is the loan amortization spreadsheet I used in this video.
On most mortgages, a large percentage of your payment goes to interest for the first several years. The mortgage doesn’t really work in your favor until about the 20th year. Have a look at this chart…
The point at which your equity rises above your debt is where this financial instrument is good for you. Before that it’s good for the bank and bad for you.
Do you have additional insight on amortization or loans? Leave a comment!
