Low-Fee ETFs vs Mutual Funds: The Ultimate Wealth-Building Showdown / Episode 37: The Dynamic Duo – Round 2!

"Compounded over time, small differences in annual fee and returns can drastically change overall performance." - Sifu

Photo by Vitaly Taranov on Unsplash

Go to Sifu’s Notebook for the Case Study on Low-Fee ETFs vs Mutual Funds
Primer: Who are Sifu & Ronin

Episode 37: The Dynamic Duo – Round 2!

Ronin: Sifu! I read today’s Case Study Notes and I see that you have another head-to-head with our friends Mike and Harvey again. Those guys never learn, do they? Fight club – part 2. Let’s get it on!!

Photo by Frederik Merten on Unsplash

Sifu: Hee-hee. I do love Harvey and Mike comparisons. In this case, I think Mike is the one that “never learns”.

Ronin: Yeah boss, when will that ijdut get a clue and just follow Harvey. He’s the genius out of this dynamic duo, isn’t he? Mike sounds like the kind of guy who pays for premium toilet paper, and then complains about inflation.

1

Managed fund fees can be 10 to 20 times higher than ETF’s lower fees.

2

Statistics show that over time, the majority of managed funds underperform ETF’s that mimic the overall market.

3

Compounded over time, small differences in annual fee and returns can drastically change overall performance.

Sifu: In our test case, the returns and fees used are very typical.

Year 10: The Slow Burn of Fees

Sifu: After 10 years, Mike, with his 7% returns minus 1.5% fees, has grown his portfolio to $170,825.

Ronin: And what did Harvey do? Kick serious ass and took names!

Sifu: Close. Harvey, with his 8% returns and just 0.1% fees, grew his portfolio to $214,358.

Ronin: Oy! That’s over 43 grand more! Mike could’ve taken that extra money and bought… I dunno, a lifetime supply of that quadruple-ply toilet paper?

Year 20: The Fee Monster Feasts

Sifu: By year 20, Mike’s portfolio is worth $291,709. Meanwhile, Harvey’s is sitting at $459,002.

Ronin: Whoa! That’s $167,000 more! With that difference, Mike could’ve gotten some actual financial advice… or maybe hired someone to slap the fees out of his mutual fund manager’s hands.

Sifu: Fees are like a silent kung fu master. You don’t see them, but they slowly knock you out over time.

Year 30: Mike’s Financial Karate Chop to the Gut

Sifu: After 30 years, Mike’s portfolio reaches $498,395. Harvey, on the other hand, nearly doubles that, finishing at $981,070.

Ronin: Ai-ya! A double?! Looks like lunch will be on Harvey for the rest of their lives!

Sifu: Seriously! Harvey walks away with $482,675 more. That’s the power of compounding.

Ronin: Mike walks away with… financial trauma. Maybe a total knockdown. That extra money paid for his fund manager’s Ferrari and his kid’s private school. 

Photo by Nathan Shintas on Unsplash

The Power of Fees and Returns

Sifu: Last time, we went over the key takeaways, but today’s test case makes the point, emphatically. Fees and overall performance matter, especially over time.

Ronin: Roger that, bossman!

Sifu: The right choices today can lead to an empire tomorrow. Small, consistent decisions lead to massive results.

Ronin: Hey Sifu, we’re kind of like a dynamic duo, right? Can I be Harvey?

Sifu: Ronin, listen up. Clearly, I’m Harvey and you’ll be Mike until you mend all your dumbass ways. You want to step into Harvey’s big ass shoes, you’d better man up. Big pants is not the same as big shoes!

Ronin: Doh!  Can’t blame a guy for trying.  Hee-hee.

Sifu’s Notebook

Case Study: Low-Fee ETFs vs Mutual Funds

When it comes to investing for the long haul, the fees you pay and the returns you earn can have a profound impact on your wealth over time. Let’s compare the financial journeys of two investors over 30 years: Mike, who uses managed mutual funds, and Harvey, who uses low-cost ETFs. Both investors start with $100,000, but the difference in fees and returns shapes their financial futures in dramatic ways.

The Setup:

  • Mike: Pays 1.5% in fees annually and earns a 7% return.
  • Harvey: Pays only 0.1% in fees annually and earns an 8% return.

Year 10: The Gap Begins to Show

  • Mike: After 10 years of investing in managed mutual funds, Mike’s balance grows significantly, but fees take a chunk of that growth. With 7% returns minus 1.5% in fees, Mike effectively earns 5.5% annually.

After 10 years, Mike’s portfolio grows to $170,825. Not bad, but let’s see how Harvey is doing.

  • Harvey: Using low-cost ETFs with just 0.1% in fees, Harvey keeps almost all of the 8% returns, earning an effective 7.9% per year.

After 10 years, Harvey’s portfolio grows to $214,358. That’s over $43,000 more than Mike’s portfolio after just one decade!

At this point, it’s clear that the combination of lower fees and higher returns is already creating a noticeable gap. But this is just the beginning.

Year 20: The Gap Widens

  • Mike: After 20 years, Mike continues to pay hefty fees. With an effective 5.5% return per year, the portfolio now grows to $291,709. While Mike has seen growth, those fees have eaten into the compounding power.
  • Harvey: Meanwhile, Harvey, with minimal fees and stronger returns, benefits greatly from compounding. After 20 years of earning an effective 7.9%, Harvey’s portfolio grows to $459,002.

After 20 years, the gap between the two portfolios is more than $167,000! Harvey’s simple decision to choose low-cost ETFs has resulted in much larger growth, while Mike has lagged due to higher fees and slightly lower returns.

Year 30: The Final Outcome

  • Mike: After 30 years of steady investing in managed mutual funds, Mike’s portfolio reaches $498,395. While this is still a significant amount, it pales in comparison to Harvey’s results.
  • Harvey: With 30 years of compounding under their belt, Harvey’s portfolio soars to $981,070. Harvey has nearly doubled Mike’s final amount, with an astounding $482,675 more!

The Power of Fees and Returns

This 30-year comparison shows the dramatic difference that fees and returns can make. While both investors started with the same amount of money, Harvey’s low-cost ETFs allowed their portfolio to grow faster and compound more effectively. By the end of 30 years, Harvey has nearly $500,000 more than Mike.

Key Takeaways:

  1. Fees Matter: Even a small difference in fees can have a huge impact over time. Mike’s 1.5% fees severely ate into their returns, costing them hundreds of thousands of dollars.
  2. Higher Returns Compound: The 1% higher returns Harvey enjoyed led to significantly greater growth. Even a small bump in returns, combined with low fees, makes a massive difference when compounded over decades.
  3. Time Magnifies Differences: Over 10 years, the gap between Mike and Harvey wasn’t enormous, but by the 30-year mark, the difference was staggering. Time amplifies both the benefits of lower fees and the downsides of higher fees.

In the end, the combination of low fees and solid returns helped Harvey come out far ahead, proving that choosing the right investment vehicle can make all the difference in building long-term wealth.

All New Episodes

Verified by MonsterInsights