Badass vs Dumbass
Master your Financial Kung Fu to be one and not the other.
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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!!
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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.
Sifu: Indeed, #1. You’re not wrong. Recall the 3 main takeaways from our last session comparing low-fee ETF’s to managed mutual funds:
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.
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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.
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:
Year 10: The Gap Begins to Show
After 10 years, Mike’s portfolio grows to $170,825. Not bad, but let’s see how Harvey is doing.
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
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
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:
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.