RP: Hello again. Ask someone how much their house or their car cost or the price of a loaf of bread, and they should be able to give you a reasonably accurate answer. But chances are, they won’t have a clue about how much they’re paying to invest for their retirement.
What’s more, if they knew, they’d probably be horrified.
LK: If you take the example of someone who drives the train on the London underground, that person will make, perhaps, £50,000 an annual income. And you see, as an example, that they take 10 percent of their income and put it equities every year. And let’s say, they’re doing that between the ages of 26 and 65. And let’s further say, that the markets did do in that period they performed the way they have historically. If you then say, on that person’s 65th birthday, the difference in their live savings between having invested in an index tracker, so like an investment vehicle that does what the market does but very cheap, and an active manager, so a mutual fund, that charges regular fees like that. That difference will amount to the same cost that’s roughly seven Porsche cars. So in today’s money, that difference is almost £300,000.
RP: Now those shocking figures are based on total charges of 1.75% a year. And when you add annual management charges to load fees, transaction costs, administrative charges and so on, that’s the sort of figure the average UK investor is paying. The lesson is simple: Generally speaking, the less you pay in costs, the more you’ll end up with when you come to retire.
LK: If you take an actively managed fund and compare that to a passively fund or an index checking fund, on average, the actively managed fund will do less well by the fees and expense, which is not great. It’s just over time that adds up to a lot of money. So expenses are unbelievably important. And if you get that right, you come a long way.
RP: And we’ll be hearing more from Lars Kroijer in future videos. In the meantime, I can highly recommend his book, Investing Demystified: How to Invest without speculation and sleepless nights. Thanks for watching.
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