Expense ratios are a critical factor when evaluating the long-term performance of an investment portfolio. Tencap’s recent decision to reduce the expense ratios of our model portfolios is a significant win for our clients – let me tell you why.
These reductions aren’t just incremental—they’re significant. For instance, the expense ratio for our 75% stock / 25% bond portfolio has been slashed from 0.77% to 0.2%. Other portfolio expense ratios have been similarly reduced.
These changes have profound implications for long-term returns, particularly for investors looking to maximize wealth over time.
What are expense ratios?
Expense ratios measure the cost of operating a mutual fund. They are calculated by dividing a fund’s operating expenses by the average dollar value of its assets under management (AUM). For example, if a fund has $1,000 in operating expenses and $100,000 in AUM, its expense ratio would be 1%. This means that for every $100 invested, $1 covers the fund’s operating costs.
For many investors—particularly those with large portfolios or long-term investment goals like retirement—the expense ratio is a crucial component of an investment strategy. The lower the expense ratio, the more your money stays invested, working harder for you instead of being spent on fees.
How Do Expense Ratios Impact Returns?
Expense ratios directly influence fund shareholders’ return on investment (ROI). Lower expense ratios mean reduced costs for investors, which leads to higher net returns.
Several studies have shown a clear relationship between low expense ratios and higher returns for mutual fund investors.
A Morningstar study found that expense ratios are a strong predictor of future fund performance. Funds with lower expense ratios consistently outperformed those with higher expense ratios over time.
This correlation has been observed across multiple studies. A 1997 study of nearly 2,000 mutual funds found that high expense ratios had a “direct, negative impact on performance.”
The lesson for investors is simple: prioritize funds (and portfolios) with lower expense ratios to maximize returns while minimizing costs.
Why Expense Ratio Matters
Expense ratios might seem like small percentages, but these small percentages can have an outsized impact on your portfolio’s growth over time. Here’s why:
Net reduction: A higher expense ratio directly reduces your net return. If a fund generates a 6% annual return but charges a 1% expense ratio, your actual return would drop to 5%. While this may not initially seem like a huge difference, the impact compounds significantly over time.
Compounding effect: Even minor fees have a compounding effect. Over time, the cost of high fees adds up, leading to a significant reduction in overall returns. With a high expense ratio, more of your investment earnings go toward fees rather than being reinvested to grow your portfolio.
Long-term impact
Let’s look at the potential impact of these reduced fees with a hypothetical $1 million portfolio invested in Tencap’s 75% stock / 25% bond portfolio.
Assuming a steady annual return of 6%, as an example (before fees), we can compare the outcomes under the old and new expense ratios over 3, 5, 10, and 20 years:
Old expense ratios:
| Duration (Years) | Total Value ($) | Net Gain ($) |
| 3 | $1,190,283 | $190,283 |
| 5 | $1,338,225 | $338,225 |
| 10 | $1,799,548 | $799,548 |
| 20 | $3,238,424 | $2,238,424 |
New expense ratios:
| Duration (Years) | Total Value ($) | Net Gain ($) |
| 3 | $1,192,726 | $192,726 |
| 5 | $1,344,888 | $344,888 |
| 10 | $1,821,539 | $821,539 |
| 20 | $3,325,999 | $2,325,999 |
Over 20 years, the reduced expense ratio results in nearly $88,000 more in portfolio value—demonstrating the power of even small reductions when compounded over time.
Final thoughts
Our decision to reduce expense ratios will significantly and positively impact our clients’ long-term wealth, in my opinion. For investors seeking to optimize their returns, reducing costs is just as essential as choosing suitable investments.
By lowering our fees, Tencap aligns with our client’s best interests, further reinforcing the importance of cost efficiency in achieving investment success. With these new, lower expense ratios, you’re in an even better position to achieve your long-term financial goals.
Tencap is committed to reviewing our investment fund line-up regularly. It is our duty to be confident that our money and our clients’ money is invested in the most intelligent, prudent and academic portfolio possible. Being an independent firm allows Tencap to have access to the entire financial market and assemble (what we identify as) excellence inside of our portfolios.
Tencap is proud to offer comprehensive financial planning and money management services to the high-net-worth clients we proudly serve. If you are interested in building and securing your wealth, Tencap Wealth Coaching is the group to interview. Call today to schedule your no-cost consultation and discover what makes Tencap’s money management philosophy appealing and academic.
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The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Utah or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. Investing always involves risk and possible loss of capital.
Greg Black, CFP®, ChFC®
Greg Black is the owner and founder of Tencap Wealth Coaching, an independent investment advisory firm founded on academic investing principles. As a Certified Financial Planner, Greg takes an educational approach to helping his clients be settled and responsible with their financial circumstances. Greg specializes in helping his clients create a proactive plan to minimize the exposure of market conditions while still harnessing the incredible power of global financial markets.
Greg specializes in "complexity" and is skilled at turning a complicated situation into an organized strategy for the families he serves. Greg, and each advisor of Tencap, is a stated fiduciary. You never have to wonder if your best interest is being served. Greg has been transforming the investor experience since 2012.
