The alternative titles for this post are:
1) Compound Interest: How your investment advisor steals more than two thirds of your money through unjustified fees.
2) Compound Interest: Why a mortgage on a value generating property is brilliant.
Part one is based on a personal experience. A “friend” recently showed me an old 401k that was managed by a professional manager. The guy charged a management fee plus put the money in C Class mutual fund shares with a 1.85% fee. Even worse, it was a horrible underperforming mutual fund.
I have to harp on the power of compound interest now. If you invest $100,000 properly it should become over $1,000,000 in 25 years, but you lose a whopping $744,000 if you give that money to a broker who charges you high fees. Compound interest is a concept that I just don’t “feel”. I understand the multiplication behind it but I don’t feel like it’s going to add up to a lot.
This is my summary of any “Trusted Advisor” , “Wealth Manager”, “Broker” out there. If they bill by the hour and don’t receive any compensation from fee based income then they might be perfect. If they make fee based income then they probably loved this character:
To frame compound interest, I created this 25 year return on a $100,000 investment.
- The first column shows a 10% return.
- The second deducts a 1.25% fee that brokers often charge so it shows an 8.75% return
- The 3rd deducts the 1.75% that over priced mutual funds your shady broker buys for you
- The 4th deducts another 2% for underperformance because, let’s face it, your broker is an idiot and can’t beat the market (I’m a little cynical, but I’m right)
Part 2: How Compound Interest Can Make You Flush!
Using the same math for compound interest, this next part shows how building a home or income property can create a lot of long term value – literally over $1,000,000. This is the opposite of what that shady stock broker is trying to do to you.
An addition, remodel, accessory dwelling or new home can produce three types of value:
- Rental income
- You can invest the income/savings and earn a return on it.
I’d note that few people use homes their homes for cash returns. The value may be having a perfect place to live with your family, or a place to work, entertain, host guests etc… you may not cash a check for this value but you’ll hopeful enjoy something that’s worth more than the dollars.
None the less, dollars are the easier way to measure value so I’ve put it in this chart here.
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