If you saw a new $3 fee on a quarterly account statement, would you sweat it before filing it away? If a new tax appeared on your cable TV bill, would you even bother to call and ask about it before you sent your payment?
You would if you were Warren Buffett.
It seems that the billionaire many times over can't help noticing the money minutiae that most of us gloss right on over (if it even catches our eye in the first place).
Take, for example, a $4 line item on Buffett's income taxes several years ago. In one interview, he talked about personally hunting down the provenance of the puzzling entry on his income-tax return. (FYI: It was a royalty payment.)
Don't bother sweating some small stuff
The takeaway is not, as you might suspect, that (a) Warren Buffett has an eagle eye (although he does) or that (b) you should spend every waking hour scouting for accounting errors (unless you consider extreme accounting a sport).
No, the point here is that Warren Buffett notices the little things. And when it comes to managing your finances, you, too, should sweat the small stuff. But (and that's an important "but") make sure it's the right small stuff -- the seemingly minuscule things that actually have monumental effects on your bottom line.
Oh, and one more thing you should know: There are a whole lot of folks who make a handsome living by urging you to let the "minor details" slide right on by unnoticed.
How Wall Street robs your retirement bit by bit
"Don't bother about those digits behind the decimal point," say the Wall Street suits. "What's the big hooey over a few basis points here or there?" they nonchalantly shrug.
In other words, "Don't worry your pretty little head over this nonsense. We've got you covered."
They sure do.
Wall Streeters have certainly covered all their bases by finding myriad ways to siphon money from your account. Perhaps you've heard of the terms "front-end load," "back-end load," "12b-1," "contingent deferred sales charges," or "expense ratio" -- all fancy ways to say one simple thing: "fee."
The worst fee-offenders tend to be specialized mutual funds -- the ones that invest in particular sectors or concentrate on smaller companies. But even large-cap mutual funds -- ones investing in behemoths like ExxonMobil
|
Mutual Fund |
Fees |
Cost to invest $3,000 over three years |
Category average cost to invest $3,000 over three years |
|---|---|---|---|
|
John Hancock Large Cap Select (MSBFX) |
Front-end load (what you pay up front to invest): 5% Expense ratio: 1.34% |
$281 |
$172 |
|
Nationwide Large Cap Value Fund (NPVAX) |
Load (front-end): 5.75% Expense ratio: 1.42% |
$299 |
$178 |
|
ING Large Cap Growth (NLCAX) |
Load (front-end): 5.75% Expense ratio: 1.44% |
$304 |
$189 |
Data from Yahoo! Finance.
Even in the historically low-cost category of index mutual funds -- without the hefty fund-manager salary or fat marketing budget -- you have to watch out for fee funny business.
Consider what it costs to invest in an S&P 500 tracker, all of which count the same companies -- Bank of America
|
Mutual Fund |
Fees |
Cost to invest $3,000 over three years |
Category average cost to invest $3,000 over three years |
|---|---|---|---|
|
Morgan Stanley S&P 500 Index (SPIAX) |
Load (front-end): 5.25% Expense ratio: 0.58% |
$216 |
$172 |
|
Munder Index 500 (MUXAX) |
Load (front-end): 2.5% Expense ratio: 0.64% |
$135 |
$172 |
Data from Yahoo! Finance.
And how do these investments compare to, say, the Vanguard 500 Index (VFINX)?
- Top holdings? Nearly identical.
- Overall fund performance (before fees)? Practically indiscernible.
- Fees? A mere 0.15%. That's it. No loads. No 12b-1 fees.
- Cost to invest $3,000 over three years? No contest.
Vanguard's offering will cost you a mere $14.40 in fees. Nothing to break a sweat over.
Don't sweat the small stuff ... if you define $70,000 as "small stuff"
So now that you've winnowed out all investments with crushing front-end loads and high management fees, you can rest easy, right? Only if you want to leave even more money on the table.
The cost to invest is only part of the overall money-making (or money-losing) equation. After all, the more you pay in fees, the less money you have invested to compound and grow over time.
In the scheme of things, sure, the difference between 1% and 1.5% is but a drop in the bucket -- a mere $0.50 of $100. Just $5 out of $1,000. Except that when you're investing those amounts on a regular basis over a long period of time, that 0.5% blip is just a warning tremor of a much bigger disaster to come.
Brace yourself.
Let's say you sock away $1,000 a year into a mutual fund earning a 10% annualized return with a 1.5% expense ratio. After 43 years, you'd have a pretty respectable $413,314 in your portfolio.
The thing is, you should be sweating bullets -- because you, my friend, have been had.
The little things sure do make a big difference
If, instead, you invested in a mutual fund with the exact same investment objective -- one that achieved identical returns over the same time period -- but charged 0.5% less in fees, you'd be a much happier camper by the time you needed your money.
Again, the only difference is that the expense ratio (a.k.a. "sales fee") is 1% versus 1.5%. Fast-forward to your leisure years -- how much of a difference are we talking about? (I know, I already gave away the punch line, but stick with me for dramatic effect.)
You'd have $480,522 in your portfolio -- $70,000 more just for catching that "inconsequential" 0.5% early on.
Stop your savings’ slow leak, starting right now
If you know where to look for the small stuff that really matters, then you're already acting a lot more like the world's most famous billionaire, who knows that even the smallest leaks steal disproportionate investment potential over time.
Warren Buffett certainly didn't get where he is by letting the little stuff slide, and neither should you.
So stop letting other people pickpocket your savings, and let the Fool help you identify the cheapest (and, of course, the best) investments in every asset class. For our short list of the best index funds for retirement portfolios, check out the "Model Portfolios" section of the Motley Fool Rule Your Retirement service (under "Resources").
Among other things, you'll find specific fund recommendations, as well as the ideal allocation plan for your situation. Click here for a free 30-day trial -- and start sweating the right stuff right now.
Dayana Yochim prefers to "glow," not sweat. When she spots an unsightly fee blemishing her portfolio's earning power, she gracefully dabs her forehead with an embroidered kerchief and then annihilates it. Wal-Mart and Microsoft are Motley Fool Inside Value recommendations. Bank of America is an Income Investor selection. The Motley Fool's disclosure policy works so hard it has permanent pit stains.
