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The Huge Cost of Active Money Management

posted Mar 10, 2015, 9:58 AM by Tim Isbell
I just read a Money magazine article dramatically illustrating the huge cost of active money management. If you put $100,000 into a fund with a 1.5% expense ratio and assume a 6%/year return for 40 years, you end up with $560,000 in your retirement fund. That sounds good until you realize that your money manager ends up with $460,000!

You could have had the same 6%/year return from a low-fee generic mutual fund - indeed, data suggests you are more likely to get a higher return than from a manager. Anyway, you could have used mutual funds with a 0.25%/year expense ratio. In that case, you would have $930,000 in your retirement account.

The Money article (March, 2015) is by Robert Zagunis, who attributed the math to Jordan Ellenberg, author of How Not to be Wrong. Zagunis suggests that his readers go to bankrate.com and run the numbers themselves. So I went to bankrate.com and in the search window typed: Mutual Fund Fees Calculator. It popped up and I plugged in some numbers. That's the source for the graphic on this page (just click to enlarge). Better yet, go to bankrate.com and run your own numbers.

For more on how your investments leak away and what to do about it, click on Reduce Portfolio Leaks.

All the best,
Tim Isbell