Warren Buffett’s Secret To A Wealthy Retirement
As an investor, there is one thing that you must be extremely wary of…
And it’s something that will have a massive impact on your returns, especially over the long run.
It’s also something that Warren Buffett has raised numerous times in the past!
In fact, in his most recent letter to shareholders, Buffett attacked brokers on Wall Street for the hefty fees they charge.
Instead of opting to line the pockets of fee-greedy fund managers, Buffett advised investors to choose low-cost investment vehicles instead.
So what impact can fees have on your long-term portfolio?
What low-cost investment vehicles should you consider instead?
And how could you grow your money for retirement by investing in them?
Let’s find out…
Why You MUST Take Fees Seriously
It doesn’t matter what investment vehicle you’re investing in, but fees are detrimental to your long-term performance.
This includes investing in shares, funds, retirement products, such as retirement annuities, and bonds.
On the face of it, an extra percent here or there may not seem much, but as you’re about to see, it makes all the difference.
To show you exactly the effect of fees on investing, let’s run through an example…
For ease, we won’t take into consideration any brokerage and associated admin costs.
But it’s vital that you look for the best deal on offer when it comes to selecting a stockbroker or investment company.
It’s well worth it.
Say you want to invest R3,000 a month for a period of 30 years.
You have found an investment vehicle that you think is a great long-term bet.
Over the term of your investment, it returns 10% a year on average.
We will use the total expense ratio (TER) as a basis for fees for three scenarios:
- 0% fee: It’s extremely rare to find this, but this is for comparison purposes.
- 0.5%: For a tracker fund,
- 2% fee: For an actively managed fund.
So what difference will the fees you pay make?
Scenario 1: 0% Fee
Investing R3,000 a month with an annual return of 10% will give you a grand total of R6,237,878 at the end of 30 years.
Scenario 2: 0.5% Fee
With a 0.5% fee, your investment will grow to R5,609,207.
The rather small fee of 0.5% has eroded R628,671 off your money.
A large amount for such a small fee.
Scenario 3: 2% Fee
Taking into account a fee of 2%, you investment will only grow to R4,111,221.
That’s a massive R1.5 million of your money going to fees compared to what you’d get if you invested with a 0.5% fee.
The evidence is clear.
An additional percentage or two has an enormous impact over the long-run.
This is because of the impact on compounding.
So, what can you do about it?
How To Slash Fees
As our simple example shows, fees are no laughing matter.
And it emphasises how important it is to look to low-cost investment vehicles.
This is even more so if you’re investing for the long run, for example, your retirement.
So what low-cost options are out there?
The most cost effective way of investing is to look at tracker funds.
You can find funds that track indices, such as the JSE Top 40, and government bonds.
Plus, it’s well worth considering government retail savings bonds to include in your portfolio.
The major benefit of these is that there are NO fees payable. This makes them unique in the investment realm.
By opting for tracker index funds, you should see returns reflecting the overall performance of the market.
And historically, the stock market gains over time.
Take the JSE All Share.
Over the past 30 years, its returns are in excess of 560%.
Of course, there have been some very good years as well as some pretty awful years, but over the long haul, it’s up.
When it comes to bonds, again this changes over time.
At the moment the yield on South African government ten year bonds is around 8.5%.
Over the past 20 years, this has fluctuated between 5.77% and 20.69%.
So how can you use bonds and tracker funds to investment for your retirement?
How To Create A Low-Cost Retirement Portfolio
As you’ve heard many times before, starting early is vitally important.
I am going to show you how much you could see your investment pot grow over 20, 25 and 30 years using low-cost investment vehicles.
As before, I am going to ignore stockbroker/admin fees, as this very much depends on your broker and/or investment company.
Of course, there is no one size fits all here.
Your portfolio will depend very much on your attitude to risk and other considerations.
The more conservative you are, the more bonds you’re likely to hold.
On the other hand, if you’re more of a risk taker, you’ll hold a heavier weighing in index tracker funds.
Picking Your Assets
For our example, I’m going to split our pot equally between an index tracker fund and bonds.
So 50% to an index tracker fund and 50% into bonds.
For our index tracker fund, I’m opting for a JSE Top 40 tracker.
There are a few different options available to invest in.
I have chosen the Ashburton Top 40 ETF purely based on TER.
This is a very competitive 0.18%, which is almost half of most of the other Top 40 trackers available.
The remaining 50% will go into bonds.
I have decided to opt solely for RSA retails savings bonds as there are no fees applicable.
They’re also very easy to manage. Once you open your account, you can do everything online.
Just click here for more information.
For the purpose of our example, I am going to assume that our ETF returns on average 15% per year.
This is below the 30 year average and on par with what Top 40 index trackers have achieved over the past ten to 15 years.
For our bonds, I’m going to use the current five year fixed rate of 8.75%.
Taking into account our two expected rates of return, this gives us an average annual return of 11.9%.
How It Works Out
So how much can you expect your investment to grow?
We are going to use an investment amount of R3,000 per month.
To help us work this out, I am going to use an online calculator.
I have used this one at Candid Money.
You can use it to see how your own retirement portfolio will look, taking into account your risk profile, contribution amount and expected returns.
You could also modify it further to take into account any initial fees payable.
Over 20, 25 and 30 years, this is how your returns could look…
After 20 years:
Your investment will have grown to R2,667,932.
After 25 years:
An additional five years grows your pot to R4,884,973.
After 30 years:
And investing for 30 years, your investment grows to R8,743,573.
As you can see, the length of time you invest has a massive impact on the end result. This is all down to compounding.
The longer your money works, the momentum with which it grows builds.
The Secret To A Wealthy Retirement
Investing for the long-term or your retirement is a nerve racking experience.
But to make the most out of what you invest, there are two key factors:
- Firstly, you need to use low-cost investment vehicles; and
- Secondly, you must start investing as early as you can.
As we looked at, fees have a devastating impact on your long-term returns.
But if you minimise these and invest for as long as you possibly can, the end result is even better!
Until then, here’s to profitable investing.
The Money Lab
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