This Investor Just Lost $181,000
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INTRO
Imagine waking up with $181,000 less than what you should have. Just to put things into perspective, here is what that kind of money can potentially buy:
· A nice sports car: $120,000
· A premium 14-day vacation for a family: $20,000
· A luxury watch: $15,000
· A home theatre system: $10,000
And if you bought all four, you’d still have $16,000 cash left over. That being said, let me tell you the story of how Michael lost $181,000. His name isn’t actually Michael but I’ll keep his identity hidden.
Let’s dive in.
The Story of Michael
Picture Michael, your typical guy-next-door. At 30 years of age, he realized that he wanted more out of life than just the daily grind. So, he decided to dive into the world of investing.
And with no background knowledge, he decided to seek help from professional advisors. Every paycheck, Michael squirreled away $500 into his managed investment fund.
That adds up over time. It wasn't a huge fortune, but it was his way of securing a brighter future. And Michael stayed true to his course for 30 years. But here's the kicker: his advisor charged a 2% annual fee. In hindsight, it was a bit of a curveball but Michael didn’t think much of it.
After all, what’s 2%, right?
The 2% Curse
One day, Michael couldn’t sleep well. Something his friend said stuck in his head...
“The fees will kill you.”
Jumping out of bed with sweat dripping down his face he quickly looked up a management fee calculator. And just like that, he found out his portfolio could’ve been $181,000 bigger.
Over the course of 30 years, that 2% annual fee had eaten into his wealth and he had paid his advisor roughly a quarter of his funds. And there wasn’t a single thing he could do now. Sorry, but not all stories have happy endings. But they do all have lessons.
So, what was his big mistake?
Advisor Fees
Thinking 2% isn’t a big fee is like running with a cut-off toe. Sure, you can run. But it’ll hurt like hell. And in the long run, fees compound just as well as the gains do.
Remember that. As acknowledged in this write-up by Faster Capital, "Over time, even small fees can add up and compound, reducing the overall return on investment."
In the example above, Michael's 2% annual management fees to advisors would reduce his annual return from 7% to a net 5%, costing Michael significantly. These fees may seem small, but over time they can have a major impact on your investment portfolio.
The following chart shows an investment portfolio with a 4%annual return over 20 years when the investment either has an ongoing fee of 0.25%, 0.50% or 1%. Notice how the fees affect the investment portfolio over 20 years.
Not to mention the fact that most professional money managers don't even beat the Market's returns - oftentimes not at all and definitely not on a consistent basis. There are many studies to support this notion. Check out this article here by the New York Times, which details that nearly 90% of actively managed mutual funds consistently fail to beat the market.
You should always manage your own money. Why? Because the advisors usually just want to maximize their fees. And this oftentimes occurs at the expense of your returns. And you want to maximize your returns. However, these two things don’t always align. I know what you’re going to say next.
Conclusion
“But I don’t know how to invest on my own.”
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Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions. I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.