4) Fees Matter/Rule of 72

John Bogle, founder of The Vanguard Group and author of several Investment books is famous for making the point that fees are extremely important in determining an investor’s ultimate outcome.  Bogle helped organize The Vanguard Group as a mutual- type company where Vanguard shareholders are the owners, thus keeping fees as low as possible.

A useful mathematical formula is known as the “rule of 72.” It calculates the time required to double your investment. For example, if your investment has a total annual return of X %, you can divide 72 by X% (or 70 for easier mental math) and the result is the number of years required to double your investment.

Let's assume your investment is worth $100,000 and is growing at 7% per year.  Divide 70 by 7 and you know that in 10 years your investment will grow to $200,000. Conversely if your $100,000 investment is growing at 10% per year, it will grow to $200,000 in 7 years.

Getting back to fees.  If a young investor can save 2% a year on fees or make 2% higher average annual returns, in 35 years, he or she will end up with approximately double their retirement funds! Even 1% is significant over a young investor’s retirement savings timeframe.

In situations, where parents or grandparents are interested in passing their savings to children and grandchildren, investing timeframes can easily exceed 100 plus years. 1-2% differential on average annual returns will result in significant differences in ultimate outcomes.