I am considering two different options for a roth IRA. A managed fund that has a higher historical growth rate but 1% fee and a self directed vanguard account, which would have a lower growth rate but lower fees.
What I want is to understand are the higher fees worth it. Which as I understand it comes down to will the higher growth rate of the managed fund cover the fees (I understand past performance is not a guarantee of future results). To do this objectively I want to do the math. I am using the formula for compound interest
A = P(1 + r/n)^(nt) * (1 - f)
- A is the future value or ending balance.
- P is the initial principal amount
- r is the annual growth rate
- n is the number of times that growth is compounded per year. If it's compounded annually, n would be 1, compounded semi-annually, n would be 2, and so on.
- t is the number of years the money is invested for
- f is the fee expressed as a decimal
Based on some articles it doesn't look like my equation is correct. Because conclusions from the above equation yield only a 1% difference in the ending balance for a 1% fee. The article concludes a much higher difference.
What is the proper equation for incorporating fees with fund growth rates?
Any info is greatly appreciated.