How do I calculate the impact of fund fees?

Question

After doing some research, I noticed that Fidelity appears to have fund fees between 0.71% and 0.91%, whereas Vanguard has fund fees between 0.21% or 0.22%. How do I calculate the impact that these differences will have on my investments?

Answer 1

It's not all that complicated. You just subtract that from the real annual return each year. That is, if the fund goes up by 2% and has a .9% fee your real return is 1.1% instead of two.

Fees can take a real bite out of your investment. I like to think of it this way: You have no real control over the rate of return of a mutual fund, but you can control how much fee you are going to pay. So by selecting a fund with a 1% smaller fee you are automatically adding 1% to the return, it is one of the few guarantees you can get.

Answer 2

Studies have shown that managed funds do not do better than the index over the long term. So when one buys a managed fund that tracks itself against the S&P and tells me they are paying 1%/yr for the privilege, I tell them that my 401(k) S&P index charges me .05%, this is 1% over 20 years, total. The other person would lose 20% over that time.

It gets even crazier when you are retired and are trying to make your money last. You are taught that a 4% withdrawal rate is pretty safe, but you may be giving a full 1% to a fund manager off the top, good year or bad.