How Paying 1% In Fees Can Cost You A Fortune – Advice From Warren Buffett

Mr. Buffett’s annual letter to shareholders is out.  I’ve read the letter for you and am highlighting the most important point.

Here it is:

1.  Buying a low cost index fund that tracks the whole market would have returned an annual return of 11.8%(pre-tax) over the past 77 years.
2. Paying a 1% annual fee to an investment manager over this 77 years period would have cut your final cash balance by 50%!

(Background information:  Mr. Buffett’s first stock purchase was 77 years ago for $114.75)

If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019.  That is a gain of 5,288 for 1.

Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3 billion.

Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to investment managers, its gain would have been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.

Click below to read the letter.

http://www.berkshirehathaway.com/letters/2018ltr.pdf