Usain Bolt Doesn’t Line Up behind the Starting Line, Why Would You?

usain-bolt2Usain Bolt is a BAMF!  Dude holds the record in the 100 meter sprint at 9.58 seconds and is the fastest man alive.  That means he is moving at a speed of over 10 meters per second (that’s 32.80 ft per second for USA readers) or a speed of 23.35MPH.  Now stop reading, go outside, and time your 100 meter dash…

Are you back from your sprint?  Good.  Now you see how fast he is!  Or, you could have just watched his record run:

Sorry, I could have told you to watch the video instead of going outside and running.

Yes he’s fast, but what’s my point?

If we look at the times in the finals from that run, we see the importance of the competitors starting at the same line and starting at the same time.

Rank Lane Name Nationality React Time Notes
01 !1st 4 Usain Bolt  Jamaica 0.146 9.58 WR
02 !2nd 5 Tyson Gay  United States 0.144 9.71 NR
03 !3rd 6 Asafa Powell  Jamaica 0.134 9.84 SB
4 3 Daniel Bailey  Antigua and Barbuda 0.129 9.93
5 8 Richard Thompson  Trinidad and Tobago 0.119 9.93 SB
6 1 Dwain Chambers  Great Britain 0.121 10.00 SB
7 2 Marc Burns  Trinidad and Tobago 0.165 10.00 SB
8 7 Darvis Patton  United States 0.149 10.34

The average finishing time of the field is 9.91625.  Average doesn’t get you a medal.  The difference from first to last place is a mere 0.76 seconds.  Not even one second.  Essentially the blink of an eye.  If Bolt gives his competition even a half second head start he finishes towards the bottom of the pack, and most of the world doesn’t know who he is.

Yes, but I still don’t see your point.  I thought this was a personal finance/financial independence/early retirement web site? Not Sports Center.

Hear me out, it’s a metaphor.  Lots of people are lining up behind the starting line everyday when they invest.  How so?

High fees!!!

Expense Ratios, Commissions, Mortality and Expense Fees, Wrap fees, Reach Around Fees, Annual Fees, Fees on top of Fees.  I could go on, but I won’t.  What’s a Reach Around Fee?  Let’s just say if you have to ask big guy…

According to Investopedia, the average mutual fund expense ratio fee runs about 1.3 to 1.5% (this doesn’t include any loads or commissions).  All mutual fund companies talk about how they can beat the almighty market with efficient alpha and other crap they spit to try and confuse investors or just sound smart (True story: I would develop a negative reaction and want to vomit every time I heard a manager talk about the efficient frontier or Capital Asset Pricing Models CAPM-both have no real world practical application).  So any investor paying high fees (or heaven forbid the investors who don’t even know they pay fees) is lining up behind the starting line, finishing the investment race at the bottom of the pack.

I can vouch for this.  I was in the industry for 15 years.  For 13.5 years at my last job, I maxed out my retirement plan investing primarily in a small cap fund.  Yes, I was lucky it was the best performing fund during that time frame, however it underperformed the Russell 2000 benchmark by 1% during that time frame, most likely attributed to the 1.30% expense ratio.  However, it pisses me off thinking of all the money I gave back to the very company I worked for, in fees (add to that the opportunity cost of underperformance).  Had I left my money invested there for the next decade, I would have shelled out $64,000 in fees.  I moved that money out and got fully invested by myself for about $500 (one time fee as opposed to the ongoing fees mutual funds and annuity companies charge).  If I had an index fund or ETF (exchange traded fund) available at 0.20% the total investment fees for 10 years would be $10,000.  Pretty big difference over a 10 year period to the tune of $54,000 and it only gets worse over time.

Here’s a nifty calculator to see the impact of fees on your hard earned money over time.  You should play around with it.

Now, I am a proponent of investing in individual stocks and give coverage and commentary on my various holdings on the site.  I have a primarily buy and hold  strategy (or as I like to call it Actvely Passive), and live off the dividends/dividend growth and never sell.  That is how I am able to pay the upfront trade cost of $10 through Ameritrade and not pay any ongoing fees.

For people not comfortable investing in individual stocks, you really just need to look at low cost index funds (like Vanguard-all other fund companies just need to die) or low cost ETF options.  That is how you can ensure you don’t line up behind the starting line and finish the investment race at the bottom of the pack (with a lower balance).  Also, given that the vast majority (approximately 75%) of mutual funds underperform their respective benchmarks, you are taking less risk of underperforming by indexing and keeping some more money in your pocket against the reach around fees of actively managed funds.  So, line up as close to the starting line as possible, keep the dead weight to a minimum, and cross the finish line first.

So reader, have you looked at the cost of the investments in your 401(k)?  Challenge your HR department to explore better providers and investment options for your hard earned money.  Sound off below.

(Fun Fact: Fidelity employees sued their own employer, Fidelity (duh!), because the options available in their own 401(k) were charging higher fees, when obviously Fidelity has lower fee option funds available.  That’s how big a deal this stuff is)


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Readers Comments (45)

  1. Our 401K is absolute crap for fees and does not offer a match. I go elsewhere, because they will not waste my freedom.

    • Hey ZJ,
      That’s the unfortunate thing for a lot of 401(k) participants, me being included. The original intent was good, but the fund companies screwed with everything.
      If someone doesn’t get matching contributions, has horrible fees, and doesn’t max out, then an IRA (roth or traditional) is the way to go.

      Unfortunately the HR person in charge, probably doesn’t understand the fee stuff.

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