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Old 09-01-2013, 04:34 PM
 
Location: Under a bridge
2,422 posts, read 3,487,903 times
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I follow this blogger, The Confident Investor, on Twitter and I thought I would post this article here.

The article basically points out the importance of fees and the implications these costs can have in your portfolio. As many already know paying high fees/commissions during the course of time will kill your mutual funds investment. He also outlines a few examples of how portfolios are affected by fees and he believes that mutual funds are now inefficient.

Anyways, here it is and as always I welcome your thoughts regarding this blog.

Why the Average Mutual Fund Return Stinks « The Confident Investor

-Cheers.
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Old 09-01-2013, 04:57 PM
 
92,610 posts, read 90,235,122 times
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How about when some of those holding low fee index funds bail and sell at lows while those holding funds with higher fees stay the course and make money?

There are so many variables to a return in the real world and fees are only one part of the puzzle. You can pay higher fees and get other things correct and win the game.

Fees are important but when not looked at in a vacuum they are merley just a piece of the overall puzzle.

i have not used index funds or the lowest cost funds in 26 years. by having the over all portfolio work together the sum of the parts was greater than anyone of the funds by themseves.

compared to the s&p i have beaten that index by a wide margin with 20% less risk most of the time.

in 1987 when i started wiith a popular newsletter some of us here follow ,100k in the growth model from the newsletter beat the s&p 500 by 500,000.00 bucks after expenses as of december.. the fund only uses plain ole fidelity managed funds.

many didn't even beat their index in the years the entire portfolio beat the s&p 500.

that does not take in to count the fact as low as they are there would have been fees on the s&p 500 fund which are not included in just the index comparison.


these are nothing special fidelity funds that just play nice with each other.


Date----- ----- Growth--- S&P 500--- Difference
12/31/1987 -- $102,765 -- $105,286 ---$2,521
12/31/1988 --$129,534 -- $122,713 -- $6,821
12/31/1989 -- $168,890 -- $161,564 -- $7,326
12/31/1990--- $161,464-- $156,842 -- $4,622
12/31/1991-- $227,014 -- $204,643 --- $22,371
12/31/1992--- $262,599 -- $219,761-- $42,837
12/31/1993 -- $346,455-- $241,910--- $104,545
12/31/1994--- $339,285--- $245,068-- $94,216
12/31/1995--- $431,591 ---$337,581 --- $94,010
12/31/1996 --- $514,409 --- $415,170-- $99,240
12/31/1997--- $645,374---- $553,403-- $91,971
12/31/1998 --- $709,066 --- $712,728 ---- -$3,662
12/31/1999-- $914,529--- $862,493 --- $52,036
12/31/2000--- $816,056--- $783,761--- $32,295
12/31/2001--- $763,605--- $690,985--- $72,620
12/31/2002--- $632,982--- $538,492 --- $94,490
12/31/2003 --- $925,018--- $693,844--- $231,173
12/31/2004--- $1,039,784-- $769,652--- $270,131
12/31/2005 --- $1,156,661 --- $808,337 --- $348,324
12/31/2006 --- $1,337,789 --- $935,976--- $401,813
12/31/2007--- $1,435,767--- $987,069 --- $448,698
12/31/2008--- $822,516----- $613,416--- $209,101
12/31/2009 --- $1,083,957--- $775,484--- $308,473
12/31/2010---- $1,275,663 --- $892,238---- $383,425
12/31/2011--- $1,253,930--- $910,762 --- $343,168
12/31/2012 --- $1,454,744 --- $954,519--- $500,225

Last edited by mathjak107; 09-01-2013 at 05:23 PM..
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Old 09-01-2013, 05:28 PM
 
186 posts, read 337,641 times
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It's much worse than guys realize. We've averaged 5% inflation per year, since 1970 or so, thanks to our wars and other silly bs wastes of resources. So, when your fun averages 10% per year and you pay 15% "self employed" ss on it and then say, 25% income tax you clear 6% per year, minus the inflation, what you really made was a lousy 1 % return per year.
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Old 09-01-2013, 05:31 PM
 
92,610 posts, read 90,235,122 times
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the point is no one knows which COMBINATION of funds that make up a total portfolio will win. had i tried to match up all the managed funds i used through the years in that growth model with lower cost equals i couldn't. many funds are unique and there are no equals.

so yes i could have found lower cost funds but my performance as a total coherant portfolio might not have done nearly as well.

i just listened to jack bogle on friday as he was on the consuelo mack show.

for 30 minutes he talks fees fees and fees. it is easy to see why cults have risen listening to him . he isn't wrong either , providing a lower cost fund exists to match with other higher cost funds and work exactly the same in a portfolio.


while it is easy to go fund by fund and compare performance the real world is very different when total portfolios are compared., you almost can't compare most of the time.

i have not tracked my funds individual performance compared to its index in more than 20 years. i haven't worried about the fact fees could be lower somewhere else. i only care about the bottom line when all the parameters that affect our bottom line combine to make it what it is.
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Old 09-01-2013, 05:40 PM
 
Location: The Pacific NW.
879 posts, read 1,864,528 times
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Mathjak, you always bring this up whenever someone mentions the importance of low fees. And while you are absolutely correct that asset allocation and buying/selling at the right time is more important than fees, I see it as a bit of a red herring. Yes, you want to do other things right, but that doesn't change the fact that fees can still have a great impact on long-term returns, regardless of the strategy being used, so they are important to consider.

Have you ever figured out what the difference in your returns would have been if your fund fees had been, say, 1/2% lower? Or if you had used index funds instead of...what is it you use...Fidelity funds? I'd be curious to know the answer.

Edit: I see you sort of already answered that above as I was typing. I hate it when that happens.
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Old 09-01-2013, 05:50 PM
 
92,610 posts, read 90,235,122 times
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looking at total portfolio performance is a very different thing from simply looking at individual fund performance.

portfolio performance is going to be only unique to you . it comes down to could you have found funds that could duplicate that portfolio with less fees and hense p/u more gains.


the only person low fees can actually make a difference to would be the person doing the comparison in his own portfolio assuming he could find similiar funds that are lower cost..

sure i would have loved to have lower fees but you know what ? then i have a different portfolio with different funds so you really can not say what the results would have been..

as an example for one of the funds in the model at times we used fidelity export and multinational fund . great fund for a weak dollar. when the dollar turned we swapped for another fund which performed in a stronger dollar .

working together the two funds brought in beautiful gains ,even though neither fund beat its index the returns totally trumped any index fund i could have held..

the point is the performance of a total portfolio cannot many times be duplicated by anything lower cost because it does not exist exactly as it is.

a good portfolio does not just sit static if it is to out perform. like nudging a big ship the portfolio is every so often nudged back on course utilizing slightly different weighted funds at different times to better fit the big picture. those funds integrate and mesh with the other funds in the model.

What each fund does is not as important as the action of them working together.

that is just how we managed to beat the s&p 500 over so many decades using nothing special fidelity funds.

i can never say how my model would have done since many of the funds we have used have no exact equals. take a fund like fidelity capital and income. it is a high yield bond fund that buys 20% distressed stocks as well. there is nothing to equal that you can even compare against.

no one can tell me i didn't maximize my gains because i payed higher fees because i couldn't get that performance with lower fees in my portfolio since the funds we used do not exist just as they are.. i would have to try to do something similiar but who knows if it would perform or act the same so i can't really say...

hopefully you follow what i am saying because i am not sure i am explaining it in an easily understood concept.

the best way to explain it is like going into battle. if you listen to the gun manufacturer your choice of firearm means everything. that is jack bogle speaking.

but the battle depends on so many other things being right and since no one can get them all right it is the combination of all the parameters that gives us our returns.

if your model portfolio is performing and lets you sleep at night altering it for something more low cost may upset the entire weighting and balance.

you may improve costs but upset some other parameter.


as far as what i use ? yes 100% fidelity funds and for more than 25 years the fidelity insight newsletter.

Last edited by mathjak107; 09-01-2013 at 06:45 PM..
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Old 09-01-2013, 06:14 PM
 
92,610 posts, read 90,235,122 times
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Quote:
Originally Posted by trundle View Post
It's much worse than guys realize. We've averaged 5% inflation per year, since 1970 or so, thanks to our wars and other silly bs wastes of resources. So, when your fun averages 10% per year and you pay 15% "self employed" ss on it and then say, 25% income tax you clear 6% per year, minus the inflation, what you really made was a lousy 1 % return per year.
according to dr wade pfau one of todays top financial reserchers the actual real return we can expect going forward utilizing equities and bonds may be no better than a 2% real return and that is before taxes.

for some interesting reading from dr pfau click here

Retirement Researcher Blog: Compound Interest and Wealth Accumulation: It's Not As Easy as You Think
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Old 09-02-2013, 03:24 PM
 
Location: TX
795 posts, read 1,309,919 times
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Fund malperformance is mostly from forced turnover of the investor herd. Tempting to blame fees but no cigar.

When a fund is down, redemptions force the manager to sell for 80 cents on the dollar. When up, inflows force the manager to buy for $1.20 on the dollar. This effect, repeated monthly, dwarfs your average fee.

The best funds (think Fairholme, Sequoia, Baupost) routinely close their funds for extended times at performance heights. This is precisely when more investors want in, but their new capital would dilute existing positions and drag on the fund. Most managers are simply not willing to close their funds.
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Old 09-02-2013, 05:11 PM
 
92,610 posts, read 90,235,122 times
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i would think non etf index funds have the same issue meeting redemptions.open index funds would have the same issues on the way up too. they have to constantly buy more of the exact same companies at higher and higher prices as well as don't forget the index is weighted by not the best companies with the biggest growth potential but those that are the biggest already .

they have to buy more of companies that have seen there run up , got very big and have little more to gain . the 50 largest companies dominate an entire total market fund since 70% of a total market fund is controlled by where the s&p 500 goes and those 50 companies can move all the other 450 in the s&p 500 good or bad..

the night before the s&p 500 admitted google the stock soared over 7% in after hours trading because the index funds had to buy it the next day.. the index bought google at a way inflated price the next day.

by the way index funds are not actually unmanaged funds with no decisions being made as what to buy.. there are managers who decide what funds are in these indexes and when funds are added , booted out and swapped.

ever think about the fact your gains would be much higher if they picked better stocks for the indexes. they have some laggards in those indexes that were poor choices.

how many of the the origonal dow stocks are left? most went bankrupt , were taken over or just vanished. so yes buying decisions are made for indexes ,they are just made on a different level.


from forbes:

Here are the original dirty dozen of 1896 and where they are today:
•American Cotton Oil – Ancestor of Best Foods, now part of Unilever.
•American Sugar – Became Amstar in 1970 and subsequently Domino Foods.
•American Tobacco – Broke up into separate businesses in 1911, expanded beyond tobacco and renamed itself American Brands; now Fortune Brands.
•Chicago Gas – Absorbed by Peoples Gas, which replaced it in the Dow in 1898. Now part of Integrys Energy.
•Distilling & Cattle Feeding – After a series of deals became National Distillers, then sold liquor assets to Diageo and fellow Dow component progeny American Brands. Rest of business now part of Millennium Chemicals.
•General Electric –Still an independent company with diversified assets around the world. Was removed from the Dow twice around the turn of the 20th century, but was reinstated both times.
•Laclede Gas – Still around, as the primary subsidiary of the Laclede Group.
•National Lead – Changed its name to NL Industries in 1971, 83% owned by conglomerate Valhi. Once known for mining, moved into paints (Dutch Boy brand), pigments and coatings. Sold paint business in 1970s.
•North American – Dissolved by a federal court in 1938, surviving successor became Wisconsin Electric, part of Wisconsin Energy.
•Tennessee Coal Iron and RR – During the panic of 1907, TC&I was acquired by U.S. steel, with banker J.P. Morgan playing a key role in arranging the merger.
•U.S. Leather – The only preferred stock in the original Dow, U.S. Leather is also the only company to have vanished with nary a trace since the trust was dissolved in 1911.
•United States Rubber – Merged first into Uniroyal in 1950s then with B.F. Goodrich in 1986. Resulting company was bought by France’s Michelin in 1990.

(Sources: Dow Jones Indexes, Prof. Richard Sylla, Museum of American Finance.)

Last edited by mathjak107; 09-02-2013 at 06:35 PM..
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Old 09-02-2013, 06:07 PM
 
Location: TX
795 posts, read 1,309,919 times
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Not really - because the objective there is to match not beat, the inflow/redemption effect is moot. That aggregate behavior effects the index itself and the fund, so a self-fulfilling prophecy keeps them effectively in lockstep. And investors don't hop from one index fund to another for performance to nearly the same degree as active funds.
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