A Reminder That Fees Can Cripple Your Retirement

From Matthew O’Brien at The Atlantic, a reminder that index funds are superior to fee-laden actively managed mutual funds when it comes to saving for retirement.

It’s hard enough for funds to beat their benchmarks over just one to three-year periods. But that gets damn near impossible the longer you go. Once you account for survivorship bias—that bad funds go bust, and disappear from the sample—almost 80 percent of actively managed funds don’t beat simple index funds over 10 to 15-year periods.

In the meantime, you’re stuck paying fees. Those fees don’t sound too bad—just 1 percent!—but this is where our total lack of intuition for how compounding works really hurts us. Let’s try an example: what’s 0.99 to the 40th power? It’s not exactly a calculation you can do in your head. It’s not even one you can estimate. But it’s the kind of calculation that you need to do to figure out how much your 401(k) fees are costing you.

Basically, all you really need to know is that low-cost index funds is the way to go when choosing investment options for your 401(k) or other retirement accounts. Just ask Matt Levine.

Photo: Ernst Moeksis

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