Compound interest vs real world

[trajan]

When you guys speak about (broker or bank) "fees", these would be on the potential earning, not on the money invested itself...?

What I mean is that if the processing/maintenance fee is, for example, 0.1023％ and the investment earns 4%, the fee is taken from the earning 4%, right?

And if there is a loss, there is no fee?

Apologies if these questions are too basic. I feel like I'm going in circles a little bit.

Fees are applied to the entire amount invested, regardless of whether it makes a profit or a loss.

That has to hurt. It has to.

[TokyoBoglehead]

When you guys speak about (broker or bank) "fees", these would be on the potential earning, not on the money invested itself...?

What I mean is that if the processing/maintenance fee is, for example, 0.1023％ and the investment earns 4%, the fee is taken from the earning 4%, right?

And if there is a loss, there is no fee?

Apologies if these questions are too basic. I feel like I'm going in circles a little bit.

Fees are applied to the entire amount invested, regardless of whether it makes a profit or a loss.

That has to hurt. It has to.

The companies that offer these funds are for profit businesses. .1% is a very reasonable fee for a fund that reinvest dividends. Emaxis Slim for example has over 3000 stocks to track and balance, between many different countries and currencies.

Here, is a great calculator to show the impact. -> https://www.buyupside.com/calculators/feesdec07.htm

[mighty58]

That has to hurt. It has to.

You're confusing two different types of fees here.

What you call "bank/broker fees" are commission fees taken by the banks/brokers, who get a sales commission from the fund managers if you buy a fund through them. Remember, the banks/brokers are nothing more than an intermediary, they are not the actual fund managers. This gets broken down further into two different types: a. a "load", which is a fee that you pay at the time of purchase, say, 1% on the amount you invest. b. an exit fee, where they take, say, 0.3% at the time when you sell. These fees have ZERO value and must be avoided at all costs.

The other fees are what the fund manager themselves take. This is the MER (management expense ratio). This is what the 0.1023% you referred to above is referring to. This is how the managers of the fund gets paid. Index funds, because they make buying/selling decisions automatically/algorithimically (aka passive fund), have lower fees, like this 0.1%. Other funds, who have a human fund manager who solicits funds claiming to be able to beat the market with his special skills (aka active fund), charge more in MER because said fund manager and his staff are paid very high salaries. Many active funds charge MERs of 3% or more.

The goal in investing is to minimize fees. Selecting a passive index fund (like the eMaxis slim series) that have zero load, zero exit fees, and 0.1% MER, is by far your best decision. This 0.1% does not "hurt", it is the cost of putting your money to work. And it's very low, all things considered. And of course your principal (the amount you invest) is at-risk, that's the game.

The zero-cost alternative is to let your money sit in the bank, where you will be guaranteed 0.1% (or less) in interest, while losing 2% (or more) to inflation. Oof.

[zeroshiki]

OP seems to be extremely risk averse so I do recommend for you to read up on the concept of passive funds first before taking the dive. If management fees of any sort assessed on funds is a bridge too far for you then the bank or a government bond is probably as far as you're willing to go.

[trajan]

OP seems to be extremely risk averse so I do recommend for you to read up on the concept of passive funds first before taking the dive. If management fees of any sort assessed on funds is a bridge too far for you then the bank or a government bond is probably as far as you're willing to go.

I am indeed risk averse because I do not understand the process.

Between fees, taxes, whatnot, how are you guys making out in the end?

It is logical to assume you all see a benefit in doing these investments, so it must pay eventually. I just fail to see it through from where I am.

[trajan]

That has to hurt. It has to.

You're confusing two different types of fees here.

What you call "bank/broker fees" are commission fees taken by the banks/brokers, who get a sales commission from the fund managers if you buy a fund through them. Remember, the banks/brokers are nothing more than an intermediary, they are not the actual fund managers. This gets broken down further into two different types: a. a "load", which is a fee that you pay at the time of purchase, say, 1% on the amount you invest. b. an exit fee, where they take, say, 0.3% at the time when you sell. These fees have ZERO value and must be avoided at all costs.

The other fees are what the fund manager themselves take. This is the MER (management expense ratio). This is what the 0.1023% you referred to above is referring to. This is how the managers of the fund gets paid. Index funds, because they make buying/selling decisions automatically/algorithimically (aka passive fund), have lower fees, like this 0.1%. Other funds, who have a human fund manager who solicits funds claiming to be able to beat the market with his special skills (aka active fund), charge more in MER because said fund manager and his staff are paid very high salaries. Many active funds charge MERs of 3% or more.

The goal in investing is to minimize fees. Selecting a passive index fund (like the eMaxis slim series) that have zero load, zero exit fees, and 0.1% MER, is by far your best decision. This 0.1% does not "hurt", it is the cost of putting your money to work. And it's very low, all things considered. And of course your principal (the amount you invest) is at-risk, that's the game.

The zero-cost alternative is to let your money sit in the bank, where you will be guaranteed 0.1% (or less) in interest, while losing 2% (or more) to inflation. Oof.

Very informative. Thank you for taking the time to write this up.

[goran]

That has to hurt. It has to.

To put things into perspective 0.15% of 1 million is 1500!
So assuming that yearly return is about 7%, for each 1 million invested you are getting around 68,500!

Compare that with JPY 1000 that you might have gained by parking the money in a bank with 0.1% guaranteed interest rate.
Over 68 times reward for the risk!

[trajan]

That has to hurt. It has to.

To put things into perspective 0.15% of 1 million is 1500!
So assuming that yearly return is about 7%, for each 1 million invested you are getting around 68,500!

Compare that with JPY 1000 that you might have gained by parking the money in a bank with 0.1% guaranteed interest rate.
Over 68 times reward for the risk!

Oh, I understand compound interest. It's the point of the thread.

My issue is with the assumption. What has been your experience return-wise over the last few years?

[goran]

That has to hurt. It has to.

To put things into perspective 0.15% of 1 million is 1500!
So assuming that yearly return is about 7%, for each 1 million invested you are getting around 68,500!

Compare that with JPY 1000 that you might have gained by parking the money in a bank with 0.1% guaranteed interest rate.
Over 68 times reward for the risk!

Oh, I understand compound interest. It's the point of the thread.

My issue is with the assumption. What has been your experience return-wise over the last few years?

The numbers that I put up was only for one year. So, fundamentally, its simple interest.

Anyways, my passive index fund investment journey is a recent one. Others with decades of investment may be better positioned to respond to this question.

But here's my short experience:
Started earlier this year around April, with a lump sump. And then adding monthly sums since then. Everything into Emaxis slim all country.
Overall my account is around 3.3% in the positive. (The market has tanked since I went in lumpsump, but the depreciation of JPY has helped to give a positive outlook.)
However, I understand that this is a long game and I don't need to worry about how my returns are right now. Therefore, I don't get excited or disappointed about how my portfolio looks or fluctuates right now.

I also tried to put a small amount into Emaxis slim S&P500 in February (mostly to get used to the interface). The growth there is around 15%. (again thanks to JPY tanking)

Back home, I have small amounts in individual stocks from 15 years ago. That has managed to grow by about 5-6 times due to dividend re-investment and other bonus system. (this is compounding, from what I understand)

[trajan]

To put things into perspective 0.15% of 1 million is 1500!
So assuming that yearly return is about 7%, for each 1 million invested you are getting around 68,500!

Compare that with JPY 1000 that you might have gained by parking the money in a bank with 0.1% guaranteed interest rate.
Over 68 times reward for the risk!

Oh, I understand compound interest. It's the point of the thread.

My issue is with the assumption. What has been your experience return-wise over the last few years?

The numbers that I put up was only for one year. So, fundamentally, its simple interest.

Anyways, my passive index fund investment journey is a recent one. Others with decades of investment may be better positioned to respond to this question.

But here's my short experience:
Started earlier this year around April, with a lump sump. And then adding monthly sums since then. Everything into Emaxis slim all country.
Overall my account is around 3.3% in the positive. (The market has tanked since I went in lumpsump, but the depreciation of JPY has helped to give a positive outlook.)
However, I understand that this is a long game and I don't need to worry about how my returns are right now. Therefore, I don't get excited or disappointed about how my portfolio looks or fluctuates right now.

I also tried to put a small amount into Emaxis slim S&P500 in February (mostly to get used to the interface). The growth there is around 15%. (again thanks to JPY tanking)

Back home, I have small amounts in individual stocks from 15 years ago. That has managed to grow by about 5-6 times due to dividend re-investment and other bonus system. (this is compounding, from what I understand)

Thank you for sharing your experience. I appreciate it.