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Fees are really important. And people looking at fees say, "No, they can't be." And I say,
"Yes, they are." And people say, "They can't be." And then they think of a four-letter
word and a single number. The single number is 1%. The four-letter word is only, only
1%. And that is not an accurate way of describing fees.
First you ought to say first of all you've got the money. So you already have your money.
So it's not 1% of your money. It's 1% of something else. Your manager, okay, he's going to deliver
investment results. Fine. What investment results is a normal expectation, 7%, 8% maybe.
Okay, let's say 7%. What is the fee of 1% of assets? What's that same amount as a percent
of returns? About 15%. 15% is a lot different from 1%. You don't use the word only with
15%.
They say, Wait a minute. I remember in economics. In economics we said everything was price
comparative. So I know there's a commodity product called an index fund. And it'll give
me the full market return at no more than the market level of risk, absolutely assured,
reliable over and over and over again.
So if go to active investing I better get either a lower risk or a higher return. And
what's the fee is a fraction of that higher return or lower risk. And there unfortunately
the fee works out to be-- incremental fee for active over the fee for indexing turns
out to be over 100%.
There is no better way to identify which funds will have the best future returns than low
cost. And low fees is over and over and over again the best predictor of better results.
Even the head of Morning Star has explained that they've done the research and come up
with the best predictor of future performance is low fees.