“The Miracle of Compounding Returns is Overwhelmed by the Tyranny of Compounding Costs.” — Jack Bogle
Compounding returns are often celebrated as the magic of investing—the idea that your money works for you and grows exponentially over time. But Jack Bogle’s words serve as a sharp reminder: compounding can just as easily work against you when fees are in the picture.
How Your Money Snowballs Over Time
Think of compounding like a snowball rolling downhill. Each rotation picks up more snow, growing the ball larger and faster. Over 20 years, $1,000,000 growing at 7% annually would turn into almost $4 million ($3,869,684). It’s the kind of growth that turns saving into wealth-building.
But what happens when fees get in the way? Imagine someone picking off chunks of that snowball on every rotation. That’s exactly what high fees do—they erode your momentum.
Fees: The Hidden Villain of Wealth Building
Fees may look small on paper, but over time, their impact compounds just like your returns. Let’s look at two common examples:
What 1% Really Costs You
Take an advisor charging a commonly quoted 1% fee on assets under management (AUM). On a $1,000,000 investment over 20 years:
1% advisor fee: Reduces the portfolio to approximately $3,207,135, a difference of $662,549 compared to no fees.
That’s a $662,549 difference—17% less wealth—caused purely by fees eating into your returns.
How Fund Costs Quietly Chip Away at Your Future
The above was the advisor fee, but portfolio holdings liek mutual funds and ETFs also have costs. Consider the average expense ratio for actively managed equity mutual funds, which is around 0.59%, according to Morningstar’s 2023 Annual U.S. Fund Fee Study (source):
0.59% expense ratio: Reduces the portfolio to approximately $3,465,819, a difference of $403,865. Evaluating the expense ratio of your aggregate portfolio is good practice.
Many advisors will say that the higher expense ratios may be justified if funds outperform their benchmarks, but that typically doesn't play out in reality.
Take Control: Reclaim Your Wealth Potential
Here’s the good news: you have control over costs. To explore how advisor fees might impact your own investments, visit our advisor fee calculator to run the numbers yourself. Using low-cost index funds and flat-fee advisory services can help you keep more of your returns. Every dollar you save on fees is a dollar that can stay invested and grow. (additional reading: Understanding Advisor Fees)
Jack Bogle’s wisdom highlights a truth many overlook: fees aren’t just a line item—they’re a direct drag on your financial future. By keeping costs low, you’re not just avoiding the tyranny of compounding costs—you’re reclaiming more of the potential of compounding returns.
About This Series
The Money Talks blog series explores timeless quotes on wealth, investing, and life, diving into the lessons they offer for making smarter financial decisions. These are the quotes we live by—guiding principles that inspire us to rethink how we manage wealth and life in our complex world.
About the Author
Carson McLean, CFP®, is the founder of Altruist Wealth Management, a flat-fee, fee-only, fiduciary firm dedicated to helping clients nationwide make smart financial decisions. With over 15 years of experience, Carson focuses on evidence-based investment strategies that prioritize transparency and long-term growth.
Disclosure:
This content is for informational purposes only and should not be considered personalized investment advice. The scenarios presented are hypothetical and based on the assumptions stated in the article, including a 7% annual return over 20 years. Actual investment performance and fees may vary. Expense ratio data is based on Morningstar’s 2023 Annual U.S. Fund Fee Study. For more details, visit Morningstar. Always consult with a financial professional regarding your unique financial situation.