A Real Example Showing Why You Need To Be In The Market

If you’re new to my story, I reached financial independence in my mid 40’s.  I started investing money in the stock market in the mid 1990’s after reading Money magazine and realizing mutual funds were pretty simple and easy. 

The FIRE movement wasn’t around, and the world wide web was still in it’s adolescent years.  So information was limited as compared to today.  But overall I made pretty smart decisions for a beginner.  I only dabbled in individual stocks sporadically, and after some tough punches I gave it up. 

I realized mutual funds were the way to go.  But there’s two things I did early on that I now wish I hadn’t. 

First, I didn’t go all-in on index funds.  I did buy Vanguard’s S&P 500 index fund and made it a substantial part of my portfolio.  But I also bought some actively managed funds.  You know, the kind with the higher fees that help pay for the $60,000 BMWs of mutual fund managers. 

The second thing I wish I hadn’t done is buy those various index funds from a number of different companies.  At the time I was using historical data to choose the funds I wanted to buy, not realizing the hassle of getting 1099’s every year from numerous companies. 

And of course later on as the internet matured it also meant having to maintain separate passwords for the online sites of those same companies.  Let’s face it, it’s a first world problem if ever there was one, but still something I would have done differently if I had a do-over. 

Well, in the past 5 years I’ve slowly been selling off those actively managed funds and consolidating my assets into my Vanguard account.  Everything I’m referring to is in taxable accounts, which is why I’ve been doing it slowly. 

I have to pay significant capital gains taxes on the money when I sell these funds to move them since they’ve all done very well over the years.  So I’ve been selling one every year to minimize the total tax hit. 

And the big news is, I just sold my last one.  I’ve had money in T. Rowe Price’s Growth Stock Fund since May of 1997, and I just cashed it out and moved the money over to Vanguard.  I have no more money in actively managed funds!

 

How Did It Do?

I made an initial investment of $3500 in May of 1997 in the T. Rowe Price Growth Stock fund.  And in mid January I received a check for $23,450.00.   

It actually peaked at $26,900 last September before the market started going down.  But I had already cashed out another fund last calendar year and didn’t want to sell two funds in one year which would substantially increase my tax bill. 

Plus, the fund has been performing well, especially in recent years.  It’s a growth stock fund, meaning it has a bit of a higher risk profile.  This means it invests in fast growing and higher risk companies. 

When the overall market is having an up year, funds like this will usually beat it.  And when the market has a down year, these funds usually go down even more.  Let’s see how it did compared to the S&P 500 and to it’s benchmark of growth stock funds during the time I held it.

 

Year	TRP Growth Stock Fund	Benchmark Avg.	S&P 500
1997	26.57%	26.36%	33.36%
1998	27.41%	34.55%	28.58%
1999	22.15%	38.87%	21.04%
2000	0.27%	-13.05%	-9.10%
2001	-9.79%	-22.30%	-11.89%
2002	-23.00%	-27.64%	-22.10%
2003	31.23%	28.66%	28.68%
2004	10.24%	7.81%	10.88%
2005	6.56%	6.71%	4.91%
2006	14.05%	7.05%	15.79%
2007	10.37%	13.35%	5.49%
2008	-42.26%	-40.67%	-37.00%
2009	43.25%	35.68%	26.46%
2010	16.93%	15.53%	15.06%
2011	-0.97%	-2.46%	2.11%
2012	18.92%	15.34%	16.00%
2013	39.20%	33.92%	32.39%
2014	8.30%	10.00%	13.69%
2015	10.85%	3.60%	1.38%
2016	1.41%	3.23%	11.96%
2017	33.63%	27.67%	21.83%
2018	-1.03%	-6.78%	-4.38%

 

So the fund outperformed the S&P 500 thirteen times in 22 years, losing to it nine times.  And it outperformed its benchmark average 15 times in 22 years, losing to it seven times. 

Here are some data, T. Rowe Price Growth Stock’s ticker symbol is PRGFX.

 

It’s actually done pretty well, and continually been one of the higher ranked funds in its class.  The S&P 500 calculators tell me the same $3500 invested in the S&P 500 with dividends reinvested would have ‘only’ earned me around $17,500. 

So as compared to the market in general I’ve done very well.  Much of that difference is because the Growth Stock Fund paid substantial dividends over the years, which were reinvested and increased my number of shares annually. 

Why would I sell with these great results?  I’d like to consolidate to Vanguard as I mentioned.  And as I get older I’d like to slowly reduce my risk, and this fund has a higher risk profile.

 

The Fees

Remember that this fund is actively managed, which comes with a price. 

What is that price?  The net expense ratio is .67%, so for instance with the balance of $23,450 that I cashed out I paid a fee of $156.41.

To compare, VTSAX has a net expense ratio of .04%, so that same $23,450 in VTSAX would only cost me a $9.38 fee.  Big difference.  That $145 difference invested every year compounds, big time.

The expense ratio was even higher in the past, and like most funds it has come down over the years.  Needless to say I lost a lot of money over the years to fees.  Not so much the fee itself, but the loss of the compounding that the fee would have given me. 

Had I invested in a growth stock index fund in May of 1997 I would assuredly had better results, mostly because of the lower fees. 

This chart from Investopedia shows how much higher expense ratios can take away from your earnings over time.

That’s okay though, in the grand scheme of things I did very well. 

The bottom line is I sent T. Rowe Price a check for $3500 (yes it was a paper check back then in 1997), and 21 years later they gave me back $23,450.  And that was with two recessions in between. 

Win.

I’ll owe Uncle Sam one or two grand in capital gains taxes next year, but let’s be real, that’s a good problem to have.  And if I complain in any way shape of form I should be smacked across the face. 

So for all you young folks reading this, look at those numbers.  Save your money and invest it in the market.  I know, 21 years is a long time and you think I’m old.  So be it. 

But 21 years will happen to you, and you’ll be my age one day.  The market is there for you.  Get in, the water is nice.