The title is strong, but someone has to do the dirty work.
But is it really possible to earn 200,000 more than expected on an investment?
Yes, of course just use the right tools.
Everyone knows that not all investments yield the same result. But few people know that the same investment can return much much less if one less performing instrument is used than another.
Do you know that in 30 years of investing you could earn 200,000 more by reinvesting on the same asset just by choosing a passive fund over an active fund?
Let’s have clarity.
What are active funds?
A fund is said to be active when its component securities are actively chosen by the fund managers. The manager with constant research, analysis and selection work builds the portfolio and monitors it daily.
Because there is a high amount of resources and analysis behind the management of an active fund, the fees are often higher than for a passive fund.
What are passive funds?
A fund is passive when its objective is simply to replicate the performance of a chosen index or basket of stocks, hence the adjective “passive.”
In this case, the manager’s goal is to make the fund’s composition (and thus its movements and performance) as similar as possible to the index (called a benchmark) or to the asset or basket of stocks chosen as a reference. Accordingly, the manager will invest in the same stocks that make up the chosen benchmark index or basket (or a representative sample).
This management activity does not require constant study and research activities to select the best securities. It is about having a good quantitative pattern of replication of an index and then performing routine maintenance operations on the fund. Passive funds are also called index funds, the most famous being ETFs, exchange-traded index mutual funds. Clearly they have much lower operating costs.
Let’s give an example of how much management costs affect a passive fund and how much an active fund in the long run.
As can be seen from the chart below (source: Vanguard) if we assume two people today who start investing on the same asset or same index, or same commodity or same basket of stocks with 100,000 euros both, the first one, who will invest on active funds, will have a management cost of 1.38 percent per year that will lead him after 30 years to have 380,000 euros or so in the account, the second one who invests in passive funds (ETFs) with management cost of 0.25 percent per year, will find himself after 30 years to have 538,000 euros in the portfolio. approximately. As much as 158,000 euros more. Just for choosing an ETF rather than an active fund on the same asset.
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Let’s take another example in the wake of the previous one, more specifically:
If we invest in an active fund that benchmarks the SP500 or an ETF (passive fund) that replicates the performance of the SP500 what will be the difference in our portfolio 30 years from now?
Suppose we invest 100,000 in SP500 for 30 years.
If we invest with an active fund we will have an initial fee of 5% and an annual management cost of 1.38%.
If we invest with an ETF we will have an initial transaction fee of 0.20 percent and an annual management fee of 0.25 percent.
Suppose the SP500 grows by 7 percent per year on average. (Figure reflecting real growth over the past 100 years).
If we have invested in an active fund we will find ourselves about 490 thousand euros net, having paid 270 thousand euros in fees to the manager (thus a real net growth of our capital of 5.44% per year).
If we have invested in an ETF (passive fund) we will find ourselves about 708,000 euros net, having paid “only” 53,000 euros in fees to the manager (thus a real net growth of our capital of 6.75 percent per year.
Basically, every year we paid 1.31% lower costs.
Saving 1.31% per year seems small, but with the compuonding effect (compound interest effect), being able to reinvest these savings increases our account and by a lot. In this case we will have 708,000 euros instead of 490,000 euros! As much as 218,000 euros more!
We gained an extra 200 thousand just by choosing the best performing instrument while keeping the same asset or commodity or basket of stocks chosen.
And mind you, don’t think that if you don’t have 100,000 right away or a 30-year time horizon this doesn’t affect you.
calculate your earnings here and “have fun” checking based on the investment time you want to have and the initial assets you plan to invest, how much more you would earn with an ETF instead of an active fund.
This makes you realize how important your own education is, on how to know how to invest on your own without having to pay an investment house that offers you active funds.
Knowing how to manage your assets by knowing how best to invest with ETFs and the right stock avoids you the management costs, of 1% 2% per year which said like that sounds little but already in 10 years makes a huge difference. In 30 years they make one more apartment. Think about it.
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