When I first started reading Money Master the Game by Tony Robbins, I honestly thought the book was starting off like it was a motivational speaker/salesy, but I am starting to really get hooked on the data that Tony is giving us. I was skeptical at first as I noted in my first post but in this recent chapter, Tony starts to give us his 9 Financial Myths that we need to be aware of, and after reading Myths 1-3, my main takeaway is that you better know your total expense when investing.
What exactly do I mean by this?
Well, let’s just say that expenses are the ultimate killer when it comes to investing. Do you like math? I love math. Let’s have math show us what I mean.
Let’s pretend that you plan to max out your Roth IRA at $6K/year for the next 30 years and you earn a 10% return, which has been the standard for the S&P 500 over time. Using a simple compound interest calculator you can see that your investments would’ve turned into $987K!
Not bad for $180K total invested ($6K x 30 years = $180K).
Now, let’s pretend that you paid 2% fees on this. 2% less means that you should just be able to take $987K x 0.8, right? So, you should have $790K.
Welp, turns out that this is not the case. In fact, you would only have $680K!
But if you look at the “total invested earned” category, you can see that at 10% returns you made $807K and in the 8% example you made $500K. So, that 2% actually cost you 38% of your gains!
Why is that?
Well, you see, when you pay 2% in fees each year, you’re taking that top 2%, per se, from your balance. That very last 2% of growth that you would’ve had, you just paid out to someone that might be managing your account.
Fortunately for us, many brokerage firms nowadays will offer free trading and $0 commissions on many ETFs as well if you prefer to invest that way.
Truthfully, I don’t really see much of a reason at all as to why you would want to invest in a mutual fund. If a mutual fund is going to charge you 2%, why would you want to willingly pay away 38% percent of your gains that is “hidden” by saying 2% fees? I know that I certainly would not want to do that.
Now I do want to clarify one thing here – you need to be aware of how these brokerage firms make their money. I can drop a ton of quotes right now that are all similar to saying “you get what you pay for” but truthfully, it didn’t really make sense until the entire Robinhood fiasco that we just went through with GameStop.
To me, it always seemed like it wasn’t hard for a brokerage firm to just place my trades, but I really didn’t understand the intricacies behind the scenes. Robinhood ran into a pretty major liquidity issue and halted buying (yes, only buying and not selling) of some of the popular Reddit stocks like GameStop and AMC, and honestly I probably would’ve done the same thing when learning more about the situation, but it was yet another reason as to why Robinhood is not a great brokerage firm.
In fact, I have used Robinhood and think there are many better options. I think it’s imperative to know how your brokerage firm makes their money and if the product doesn’t seem clear, you are the product.
Instead, stick with a reputable broker that also offers free trades like Fidelity. Additionally, Fidelity has many ETFs that are 100% commission free as well if you’re not into picking individual stocks.
My point here, and Tony’s mainly, is that fees are going to KILL your returns, so why not avoid them?
Andy Tony, won’t an actively managed mutual fund outperform just putting those funds into an ETF?”
An excellent question, my friend, and one that makes a ton of sense!
This is also a question that I asked myself many times and truthfully could never understand until I read the first investing myth, “Invest with Us – We’ll Beat the Market”.
If you had to guess, what percentage of mutual funds do you think actually outperform a market index like the S&P 500?
Yep, only 4%. Isn’t that insane?! My mind was blown reading that!
How is that possible? They’re literally ran by experts that do nothing but trade stocks. Sure, maybe it wasn’t an overwhelming percent, but I expected it to be slightly above 50%.
I mean, if it’s not over 50%, then why would anyone ever invest in a mutual fund? You’re paying 2% more to lose to the market 24/25 times.
Can you imagine being a sports team that goes 1-24?
Or, if you’re the parent that has to pay for your kid to play and their team costs $1,000 to go 1-24 while the other kids pay $620 to go 13-12. That’s exactly what this is. You’re paying more to get less – LOSE LOSE!
As Robbins notes, “From 1984 to 1998, a full 15 years, only eight out of 200 fund managers beat the Vanguard 500 index”. You see, this isn’t just some small sample size – it’s 1.5 decades!
From 12/31/1993 – 12/31/2013, the average mutual fund investor made 2.54% while the S&P 500 returned 9.28%!
That means if you invested $6K/year in a mutual fund, you had $154,349 at the end of those 20 years. Do you know what the S&P 500 would’ve done? It would’ve given you $331,598. Just a mere double of your mutual fund and 6x the amount of total gains that you would’ve realized.
Yeah, that certainly sounds like something that I would want to avoid!
So, why are mutual funds so bad with their performance if its experts running it? It all comes down to this – it’s their goal!
I am a huge baseball fan, as are Andrew and Dave as you’ve likely noticed if you listen to the Investing for Beginners Podcast, so let me use an analogy with baseball. Players are starting to focus more on the analytics and realize that striking out isn’t as detrimental as it used to be when compared to the benefit of hitting a homerun.
In other words, the risk of the ultimate failure is worth the reward of the ultimate success. Make sense?
Well, it’s the same exact thing for brokerage companies when it comes to their mutual funds. They’re willing to have a lot of their mutual funds completely strike out as long as they hit some home runs in there.
In the book Jack Bogle is quoted as saying, “A firm will go out and start five incubation funds, and they will try and shoot the lights out with all five of them. And of course, they don’t with four of them, but they do with one. So, they drop the other four and take the one that did very well public with a great track record and sell that track record.”
Isn’t that messed up?
They’re basically just saying “screw it” to all of the investors of the mutual funds that had bad performance because they know they’re eventually going to get one that luckily, like literally by pure luck, outperformed the rest and then they can show those historical returns to prospective investors to get them to invest in their funds.
Honestly, it’s sickening.
The only thing that I don’t agree with Jack Bogle on is that he said 4/5 fail. Well, according to Tony Robbins, it’s more like 24/25…
But this brings me to Myth #2 – “Our Fees? They’re a Small Price to Pay!”
Remember how I had been using 2% as an example of fees? Well guess what – that was low 😊
In fact, the average mutual fund expense fee is 3.17%! That means that if you invested $6K/year for 30 years into a mutual fund, it’s not worth the $987K like I mentioned if you put it into an S&P 500 index like SPY, but rather $572K. Ouch!
And the total growth you earned is only $392K vs. the $807K at the 10% returns. So, while your annual returns are only 31.7% less, your total balance is 51% less. That’s the power, and the downfall, of compound interest!
These fees can come in many ways with many different names, such as expense ratio and transaction costs, and of course you have your tax implications, but that’s just a few to be aware of.
The thing is that it really can feel like death by a thousand cuts and honestly, I bet most people don’t even know that they’re being charged this much. And if they do, they don’t realize what 3% really does to their returns.
Up until early 2020, I had my 401k managed by Fidelity. Fortunately for me (and because my employer subsidized it), I was paying under 1% for them to manage it, but that’s still a massive impact to my total returns. I immediately changed that and managed it myself.
Sure, I can still only invest in their specific funds, but now I am only paying that fund fee of under .5% rather than that fund fee AND their .9% management fee. And do you know what that management fee got me?
They literally told me that when the market crashed, they moved my account into more bonds. AKA, they rode it down in stocks, switched to bonds and then missed the upswing…great…
Real talk, I love Fidelity – but that was enough to get me to change.
While the fees are a killer, they’re not the only thing that can be troubling about mutual funds, and truthfully the entire market, but the issue is more with the representation as we go onto Myth #3, “Your Returns? What You See is What You Get”.
This really is a basic issue with anyone when they’re first starting to invest but gains and losses are not created equally. A 10% gain is less than a 10% loss. Makes perfect sense, right?
Let’s do this – imagine you have $1000. On the first day it loses 10%. The next day it gains 10%. You’re back at $1000, right?
Your $1000 turned into $900 after Day 1 when it dropped 10%. Then the next day it rose 10%, but 10% of $900 is $90, so now your total is $990.
You had two days where your stocks performed the exact opposite, but you’re down $10, or 1%, simply because of the way that math works.
Sure, that’s only 1%, but remember how much 1% can impact your total performance? If not, start reading back from the top!
And this example is only 2 days – what if this trend repeated 15 times?
You’re now down nearly 30% in just 6 weeks – no Bueno.
Mutual funds are going to show that they were flat during this time period but the fact of that matter is that your investments are not. They are nowhere near being flat!
Now, admittedly this is something you’re always going to experience no matter how you’re investing, whether in mutual funds, stocks, ETFs, or even bonds, but it’s something to just be aware of.
At the end of the day, the fees are something that is absolutely going to ruin any sort of positive momentum that you have when you’re investing in the stock market.
We just have so many options nowadays to find great companies with the various tools online like the Value Trap Indicator or even the Sather Research eLetter if you’re hoping to avoid having to do all of the legwork on your own.
If you can just spend a little bit of time and effort, you’re going to be able to find some great companies that are going to perform well, and you’ll also save that massive 3.17% fee in the process!
I don’t know about you, but 3.17% is a pretty dang big deal to me and it’s something that’s definitely going to keep me from investing in a mutual fund unless I am absolutely forced.
Make sure to not hear what I am not saying, though. Just because I have to invest in mutual funds in my 401k doesn’t mean I’m not investing in my 401k. In fact, that’s pretty dang close to the top in my financial order of operations!