Thursday, May 23, 2013

How To Save 10,000 Today or How I Stopped Overpaying Mutual Fund Fees


Later this week I hope to lay out a primer for Mutual Funds, having just gotten off the phone with a Financial Advisor, trying to sell me a Managed Bond Fund, but I have to put that post off. Having a conversation with a salesman trying to sell me funds always pisses me off. They’ve got their rap down and it’s always a challenge to Stop, and Think about what they are saying. They always have the right answer. Despite the FACT that there is no data showing that managed funds have any advantage over simple index funds in the long run (over 15 years) they keep the pitch up. I don’t want to insult my audience but I know statistically that most people own funds that they have no idea:
1. What the funds goals are?
2. What the management fees are?
3. What the turnover is?
4. What the price or quality of the funds holdings?

These are some basic questions and most people can’t answer them. While they are all important, the most important may be question # 2. What are the management fees. Today the average fee is 1.5%. Here is how I’m going to save you $10,000 and you don’t need to know the answer to any of the other questions. I’m going to assume that you are into a lot of different funds (your advisor gave you the safety in diversification rap) and here too you don’t need to know any of the answers to any of the questions, just know that if you have a portfolio of $100,000 and are paying a 1.5% expense ratio, you will have paid $11,681 in fees in 10 years. (If you really want to get sick, try calculating the compounded interest fees for as many years as you plan on saving before you retire.)

Now here’s my plan. SELL IT ALL FROM THE MANAGED ACCOUNTS AND REPURCHASE the same stuff from an Index Fund like Vanguard. While in my opinion Vanguard is the best, most companies have gone into Index funds so if you have an account at Schwab, buy from Schwab if you want, but KNOW THAT THE FEES WILL BE MORE LIKE .1%-.5%. Now run the same compounded interest calculations and guess what, that same $100,000 at even .5% will have only cost $5,127 (or a savings of $6,554 over the 10 year timeframe). If you can find funds with a .1% fee, the cost will just be $1,005, a savings of $10,613 (which is the $10,000 I promised). The beauty of this is you are investing in the same bucket of stocks, just not giving away the fees.

If you ran this out over a much longer time, say 35 years, the amount of money you have paid in fees could represent more than a third of what you made on your investments. Additionally, now most companies have created Index funds that are as diversified as any managed fund. Need growth stocks, there is a fund for that. Looking for value, there’s fund for that. REMEMBER, although the salespersons tell you that a managed fund does better, and it might in the short term, IN THE LONG TERM THERE IS NO PROOF THAT A MANAGED ACCOUNT DOES ANY BETTER THAN AN INDEX FUND. Hey, it’s your money, your call.

No comments:

Post a Comment