Lesson 4 of 7 · 2 min · Costs

The 1% that takes a third

Why a small yearly fee is not small at all.

Pencil drawing of a green pie with a red slice of about a third taken out of it, marked 1%.
Open the drawn lesson

  1. A fund fee of 1% a year sounds tiny. It is charged on everything you have, every single year, not just on your gains.

  2. Put $10,000 away for 40 years at 7% a year. With no fees you end up with about $150,000. With a 1% fee, about $103,000.

  3. The missing $47,000 went to the fund. You took all of the risk, and still gave up almost a third of the result.

  4. A broad index fund can cost 0.03% a year. That is $3 on every $10,000, and it leaves almost all of the growth with you.

Quick question

Two funds hold the same stocks. One charges 1% a year, the other 0.1%. Which should you expect to end up with more?

  • The 1% fund, you get what you pay for
  • The 0.1% fund
  • They end up the same
Show the answer

The 0.1% fund

Same stocks, same returns before costs. Every bit of fee comes straight out of what you keep.

Keep this one

Fees compound too, against you.

Where this comes from

Our own arithmetic, with the fee taken off the return. The principle is William Sharpe’s “The Arithmetic of Active Management” (1991): before costs the average investor earns the market, after costs less.