I find compound interest pretty amazing. It’s believed Einstein once said compound interest “is the most powerful force in the universe”. Did you wonder why investors are looking to squeeze every little extra quarter percent increase? Professional investors will spend countless hours and money to improve investment returns only slightly. Meaning they will spend money (on investment analysts, economic advisers, research reports, etc.) to make additional money? The additional returns could only be a quarter of a percentage point, if that. Why is that? I thought about this the other day and ran the numbers. I was completely blown away by this. You don’t have to be a genius to take advantage of this.
The biggest downfall here is 401ks. A ton of plans (especially the smaller plans) have asset fees added on. No one sees these fees they just come off of your performance. Also, share classes in 401ks. People think they are getting the most competitive funds but in reality employers don’t understand them and advisors tend to look to make the most money. Unfortunately, they are not always there to help you. Fees just might be one reason for that.
@Evolution Of Wealth Yes this is very true. Depends upon the 401k/403b plan admin. I don’t expect their service for free but some admins charge WAY too much for their service. My wife’s company used to have Fidelity (which is a great admin) but switched to MetLife (ack I have no idea why and wasn’t aware MetLife offered that service). MetLife is OK. Fortunately they are very clear with the costs.
The other issue I have with 401k plans is available mutual funds to pick from. With my wife’s 403b plan (I don’t have one setup within my company), some of the mutual funds are great, while a few are OK and one is awful. I’ve realized to get the asset allocation I want I must start adding more to our IRAs, or maybe I should setup a retirement fund in my company. One employer I worked for their 401k plan had all actively managed funds!
This is a very nice post on compound interest. I think about all of the money I spent on cigarettes even though I have not smoked in 25 years would have been invested at 16% as some funds have done I would have over ½ million. I only smoked from 1965 to 1984 and most of the time they were less than 30 cents a pack.
@Daddy Paul: Yea also adding a little more per month adds up in the long run also.
1% makes a huge difference! (ESPECIALLY with the magic of compound interest).
Many mutual funds have MER’s that are well over 2%, I know investors Group have some that are 3% and up. I didn’t know about MER’s back when I just started investing- like you said in your “Rules of Wisdom”, no one cares more about your money than you! Too bad Investors Group didn’t tell me outright that they were going to eat up 3% of my money every year… =(
This is a great reminder to pay attention to details when choosing investments. Good stuff!
Amazing what Time does to gains with marginal differences.
It’s all about building the big nut as fast as one can and living off of it!
16% difference over the course of 30 years is not that much…