Power of Compound Interest

It is impossible to overstate the importance of compound interest.  Even what may seem small improvements in annual return will yield large improvements in outcome.  Consider two investors with identical $250,000 portfolios earning gross returns of 9.00% annually. But there is a significant difference between these two investors.  One investor has a low-cost investment adviser, with total fees of 0.45%, generating a net return of 8.55% (9.00%-0.45%).  The second pays a more typical 1.75% and so only earns 7.25% (9.00%-1.75%).  This 1.30% difference (8.55%-7.25%), compounded over decades, makes an incredible difference.  


Remember, each investor began with $250,000.  At the end of 25 years the first investor will have $1,940,000.  The second investor, with higher expenses and correspondingly lower returns, will have $1,440,000, a full $500,000 less!  Careful attention to expenses results in a portfolio 35% bigger.  No, that is not a mistake; these numbers are correct. Compound interest is really that important.  


Expenses necessarily reduce net investor return, dollar for dollar.  And consider the immense fees, nearly all avoidable, which cost typical investors over 2% annually.  Good data is hard to find (hmm, any guesses why?) but our experience with potential clients is that paying 1.5% to 2.5% is very common, even among reasonably vigilant investors.  Here at Unconventional Investor, we believe the easiest way to improve return is to reduce expenses and we do so aggressively.  


For further illustration, download this pdf.