Billionaire Warren Buffett is famous for his investing tips. The one I’m about to discuss was a real eye-opener for me. It’s something that, if ignored, could cost me or any other average investor hundreds of thousands over a lifetime.
Here’s the quote: “If returns are going to be 7 or 8 per cent and you’re paying 1 per cent for fees, that makes an enormous difference in how much money you’re going to have in retirement.”
At first glance, that doesn’t seem like a big deal. I mean, of course losing 1% is going to cost me. That’s obvious.
But the reality, which isn’t clear at first, is that this isn’t small change. The amount of money I lose could be nothing short of life-changing. Let me explain.
This table shows how I might invest over a lifetime. I’m saving £500 a month and I receive a 9% return – broadly in line with the recent history of the stock market in this country. And let’s say that I invest from age 28 to 68, which is 40 years of my working life.
| £500 a month | |
| 9% | |
| 10 years | £95,543 |
| 20 years | £321,728 |
| 30 years | £857,190 |
| 40 years | £2,124,824 |
It looks like I’d build my way up to £2.1m. A nice amount there, enough for a cosy retirement, but I’ll point out that inflation will mean that figure won’t be quite so impressive in the future. Either way, we’ve got a baseline for what to expect from my investments.
Now, I’m going to dial down the percentage return by 1%. I now get 8% on my investments. Let’s look at how that changes things.
| £500 a month | ||
| 8% | 9% | |
| 10 years | £90,642 | £95,543 |
| 20 years | £286,330 | £321,728 |
| 30 years | £708,807 | £857,190 |
| 40 years | £1,620,901 | £2,124,824 |
So, now I’ve built up to £1.6m. That’s half a million less than my previous value, all from only taking a single per cent off the returns. In terms of a percentage, I lose 24% of my money. All from that just 1% less!
24% off
If that doesn’t sound right, well, that’s what Buffett is talking about. I expect a 1% cut to slice 1% off what I get, not nearly a quarter of it all!
So how to apply this advice? Well, in short, I have to be aware of how much difference a small change in the percentage can make.
To be specific, if I buy an index fund then it pays to look for low-fee ones. Vanguard is very popular for low-fee funds that track markets like the FTSE 100 or the S&P 500. I invest in a Vanguard fund already and pay just 0.04%.
It’s important for actively managed funds too. While some big hitters might want up to 2% of all returns, I could invest in one like Scottish Mortgage that charges only 0.34%.
The advice is true even if I invest in individual companies. I can reduce my fees by shopping around for brokers or investing in larger chunks. And it’s more proof of how important research is too.
A game-changer
I’ll point out here that while 1% difference can be a game-changer, it doesn’t guarantee anything. All investments in stocks can be risky and I may get back less than I start with.
I’ll end here by showing how this tip goes both ways. In my example, if I add 1% instead of taking it away? Well, I’d end up with a £2.8m nest egg instead. That would suit me nicely, and I imagine I’d start my retirement by saying a big thank you to Mr Buffett.
| £500 a month | |||
| 8% | 9% | 10% | |
| 10 years | £90,642 | £95,543 | £100,729 |
| 20 years | £286,330 | £321,728 | £361,993 |
| 30 years | £708,807 | £857,190 | £1,039,646 |
| 40 years | £1,620,901 | £2,124,824 | £2,797,304 |
The post 1 Warren Buffett tip that’s helped me build wealth appeared first on The Motley Fool UK.
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John Fieldsend has positions in Scottish Mortgage Investment Trust Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
