Bob White is saving for retirement. He is exploring some bond funds on Fidelitys website. You should
Question:
Bob White is saving for retirement. He is exploring some bond funds on Fidelity’s website. You should explore them too. You will have to save for retirement one day, right?
You should be able to find Fidelity’s High Income Fund (SPHIX) which invests in high-yield corporate bonds. The last time I checked the expense ratio was 0.69% so each year he would have to pay 0.69% of the money invested in the fund to Fidelity. Bob thinks that is a “tiny” amount so he isn’t concerned. He browses funds from other companies and finds Vanguard’s High-yield Corporate Fund (VWEHX) is similar to SPHIX but its expense ratio is “a little” smaller, 0.23%.
Assume that both funds provide a 5% annual yield (minus the expenses) and this compounds just like interest so you can use the same formula.
i. How much would Bob’s $10,000 grow into after 40 years in the Fidelity fund?
ii. How much would Bob’s $10,000 grow into after 40 years in the Vanguard fund?
iii. What is the lesson here?
Personal Finance Turning Money into Wealth
ISBN: 978-0134730363
8th edition
Authors: Arthur J. Keown