How A 1% Investment Fee Can Ruin The Best Asset Allocation

by Corey Philip //  March 29, 2022

We all hear the mantra as investors; 'fees matter'.  Yet when it comes down to it, most investors spend far more time fretting over their asset allocation than the fees on their investments.

"Should I be 35% international or 30%?

"Should all my US exposure be S&P 500 or should I do a small tilt?

"10% gold; will that even make a material impact on my portfolio?

"Is value investing dead?

These thoughts consume investors.  I'm no exception, but if you are the rare investor that doesn't obsess over these matter in an effort to eek out a little edge, just look at all the daily posts on Reddit or forum for an idea of how many investors do.

But while you're busy worrying about allocation, fees are giving your portfolio a much bigger haircut then any asset allocation strategy.  Here we'll look at the performance of asset allocations and the impact of a 1% fee.

I have done a video on this topic you can watch (or keep scrolling to read).

How Investment Fees Are Structured

Investment fees usually come in 2 forms, the fund fees expressed as an expense ratio and the management fee (or fiduciary fee) by the advisor.

While obsessing over allocations, many educated investors skim right over fees, after all 0.5% isn't that bad.  For uneducated investors it's even worse; they often pay a management fee of 1%+ only to be put into funds with fee's of another 1%.  

Asset Allocations Of 40 Institutions

A few years back; in 2016 (so more that a few years now), the Wall Street Journal published the allocations of 40 institutionsl the Goldmans, Morgan Stanleys, and Deutsche Banks of the world.  And as you’ll see, they are RADICALLY different.  Citi Bank says only 218% in US stocks, while Fidelity says 45%!  Brown Advisory says 10% in emerging markets and JPMorgan 0%.  What does better?

Some interesting observations from this data...

  • Deutsche Bank at the highest allocation to stocks at 74%The allocation with the most amount in stocks (Deutsche Bank at 74%).
  • The average of all 50% allocated to Stocks.
  • UBS had the lowest allocation to stocks at 38%

These institutions are all over the place!  Of course each institution certainly has a 100 white paper detailing why their allocation is optimal.  

So what allocation is best?

Meb Faber took this data, and graphed the performance of these allocations.

According to Mebs research going back to 1973 the best performer was also the one with the highest exposure to equities, Deutsche Bank at 9.72% annual returns.  The worst performer was Atlantic Trust at 9.19%.

So despite all the white papers and countless hours of research that certainly went into them, the difference between the best and worst performing allocation was only 0.53%

One other thing to point out is, all these banks had exposure to hedge funds and despite that, they didn't perform better than a simple 3fund portfolio would.

A 1% Fee Applied To The Best Asset Allocation

Going forward on the topic, Faber applied a 1% fee to the BEST allocation.  

Represented by the black line above, we can see a 1% fee takes the best performing allocation to the worst... by far.  

And that is lower than the average equity mutual fund fee of 1.40% according to Fidelity.  

So top fretting over the fine details of your asset allocation.  Go with a simple portfolio that has low investment fees.  

You can get a diverse global portfolio with advisory services through a robotic advisor such as Betterment or Wealthfront for about 0.35% (including both their fees and underlying fund fees).

For a DIY investor you can implement a simple 3 Fund Portfolio (Related: Vid on My Fav 3 Fund PortfolIo) for less than 0.1% using Vanguard or Schwab ETFs at any broker.  I prefer doing this through M1 Finance as they have no platform fee and great rates on margin loans.  

About the author

Corey Philip

Corey Philip is a small business owner / investor with a focus on home service businesses.

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}