Member-only story
Wealth Building — Avoid Frictional Cost
Frictional cost will erode your investment balance over time, leading to lower long term balance
When a rocket is launched into orbit, the rocket has to generate enough thrust to compensate for the incessant gravity (friction) produced by Earth. As a matter of fact, rockets burn about 95% of their fuel to escape Earth’s soupy atmosphere. Once the rocket is in orbit, it becomes the master of space — covering thousands of miles with just a touch of propulsion.
Wealth building is similar. The Earth’s atmosphere and incessant gravity are your investment costs and fees. These fees and costs can greatly slow down your wealth building process.
Frictional Cost Definition: Frictional cost represent fees, expressed as expense ratio. In life, there is no free launch, so investing comes with fees. These fees, if left uncontrolled can greatly impact your portfolio balance in the long term.
Case Study: Let’s consider two investment strategies.
Case 1: An investment in an S&P 500 index fund with an annualized average return of 10% (net fees).
Case 2: An investment in an actively managed fund that produces an annualized return of 11% but charges 3% for management fees and costs, hence the net return is…
