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I am not nor do I claim to be a skilled investor. I don’t analyze stocks, I don’t pay much attention to expense ratios, I don’t study trends or even read prospectuses. There is nothing I do that anyone else can’t do as well, probably better.
That’s my point, investing for the future is possible for anyone at just about any income and skill level. In other words, there is no excuse. A minimal effort to learn the basics is sufficient.
What are the basics for most investors?
I’m sure there is more to consider, but the above has served me well.
I probably have too many mutual funds. The underlying investments overlap. My non-index funds I selected randomly have goals of both growth and income. I have several bond funds, including short, intermediate and long term municipal bonds – seemed like a good idea. I have two individual stocks, both utilities.
So, what did this seat of the pants approach achieve?
For the three years beginning January 2022 I had a total return of 50% or average of 16.6%. The return on investment of the S&P 500 was 37.84%, or 11.99% per year. Both include dividends (and interest in my case)
Once again, this is not a case of do as I do. My results were more luck than anything else. I have no doubt a more sophisticated approach would have better results.
Whether investing in measured in hundreds, thousands or millions of dollars, no matter how you define success, it’s possible.
I’m a three-fund portfolio disciple (total US stock, total international stock, total US bond index funds). But I have a friend who’s worked in tech for the last decade and he’s invested religiously in Microsoft and a couple other large tech companies.
While I don’t agree with his strategy, he’s in a much better position than someone who doesn’t invest at all. I also respect that he’s continued to invest in these same companies through ups and downs, removing some of his “luck” through dollar cost averaging.
Great advice please keep sharing!
Those 8 commandments are pretty good. Even bested God for brevity.
I guess brevity is a first for me😀
Richard, I think there are degrees of unskilled investing. Your plan actually sounds pretty well reasoned. But based on the many 1099B forms I have seen, many clients just own a basket full of unrelated stocks or funds based on hot tips received from God knows where.
Regarding overlap, I like Morningstar’s X-ray tool.
I would argue that expense ratio is very important to pay attention to. As Jack Bogle used to say “costs matter.” Research from Russ Kinnel at Morningstar found that a, “fund’s annual fee is the most proven predictor of future fund returns.”
As Jack was also fond of saying, “you get what you don’t pay for”
I’m sure expenses count, but I wonder about the connection to fund annual returns and fees. Is that just because fees lower returns or some other connection to investment decisions.
In any case, if someone else takes a larger piece of the pie, you receive less, but how much does it matter in dollars?
I stated what my portfolio did over four years, I’m happy.
Here are the fees for my stock funds. 0.04%, 0.96%, 0.035%, 0.98%, 0.84% and for one bond fund 0.17%. Is this good or bad, I don’t know.
Could they be lower with equal or better results? I don’t know. All I know is the total return compared with the market results which I assume does not reflect any fees.
“Is this good or bad, I don’t know..”
I believe I know. My apologies if my thinking/calculating is incorrect, but:
My expense ratio is .005 so if I have 1 million in assets I’m paying $500 in fees annually. If you were to pay your highest fee on the same assets you would be paying $9,800 annually in fees.
If you were to continue to pay the same amount annually, and compound that annually at 7% per year (the historic return of the stock market) over 30 years (a typically calculated retirement longevity) you would loose $999,560 in income. My same expenses would cost me $50,280 in lost income.
If these calculations are correct then the results confirm John Bogle’s sayings.
I would appreciate it if one of the accountants participating on the site would check my math and confirm or correct my figures.
Again my apologies if I am incorrect.
Good work David–and Rick. Even at this late juncture, Dick may be wise to move his money into low-fee funds. It’s the easiest buck most folks will ever make.
David, thanks for a fun challenge on a cold and dark January night.
Did you mean your expense ratio was 0.005 or 0.05%? $500 divided by $1M is .0005, or 0.05%.
I got a similar answer ($991K) for the future value of a series of 30 payments of $9,800 for 30 years.
I also looked at it a different way. Assuming you invested the $1M principal at the same 7% and let it grow untouched for 30 years you would have about $7.6112M at the end.
If you withdrew a 0.05% expense fee at the end of each year, and let the remainder grow, you would have $7.506M at the end of 30 years. This is about $106,000 less than the no fee case.
If you withdrew a 0.98% expense fee at the end of each year, and let the reminder grow, you would have $5.776M at the end of 30 years. This is about $1.836M less than the no fee case.
Assuming the original $1M is invested at the 7% rate, the growth in the principal also increases the yearly fee, so the impact compounds.
Investing an amount for 30 years without touching it is pretty unlikely. But even after 5 years the higher expense ratio causes a $47,366 reduction in principal over the no fee case, The 0.05% fee causes a $2,448 reduction.
Even though this is a simplistic example, it highlights the well-understood impact of compounding over time. Reducing the amount of time, or reducing the interest rate, has big impacts over time.
Note:
I created a year by year spread sheet so I could see the impact over time of the 3 cases (no fee, low fee, high fee). If you are so inclined, you can replicate the end values by calculating 3 future values:
1) Int Rte = 7%, Term = 30, PV = $1,000,000.
2) Int Rate = (7% – 0.05%), Term = 30 years, PV = $1,000,000.
3) Int Rate = (7% – 0.98%), Term = 30 years, PV = $1,000,000.
Glad to keep your mind going during the US deep freeze. I meant 0.05. So would my 30 year compounded cost then be $509,609?
Either way even a slight increase in cost compounded at the average market return (100% equity which would be a insane allocation over a 30 year average retirement) becomes a big number.
I thought I did get sort of get lost in the decimal points, that’s why I requested confirmation from someone smarter than myself. You were one of the smarter ones I was thinking of 😉
“Investing an amount for 30 years without touching it is pretty unlikely.”
Slight digression… Maybe not so unlikely with 401ks and IRAs. Although certainly not a million dollars, I believe I started investing in a 401K either the first year the megacorp offered one, 1984, or within a couple of years. I took one small loan, which I repaid. I have been taking RMDs for a few years, but not spending them. So those original deposits of a few hundred or thousand dollars have been effectively untouched for around 40 years. Pity it wasn’t a million, but happily the fees were always low.
Kathy, it certainly is possible for retirement funds to grow for decades, especially if you consider the pre-retirement years also. The scenario I was analyzing (per David’s post) was a 30 year retirement period. That’s what I was referring to – not touching a $1M principal during those 30 years, especially with RMDs. I’m sure it does happen, however. The hypothetical scenario could be a post-tax account. When I think about it, there are likely dollars in my IRA that were deposited more than 35 years ago.
The 0.96%, 0.98% and the 0.84% are bad. I know.
Don’t forget “don’t put too much in your employer’s stock”
Very true. But I violate that as well.
I know–thus my comment. Just curious how that stock did over the last three years. In other words, how much of that 50% is from your former employer’s stock?
About 10% of the total gain.