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Opportunity costs are not vague or uncertain at all. That 1.5% (or whatever the ER) will cost exactly that much over the life of the investment given the rate of return. You have to consider them, otherwise you are not getting an accurate picture of your results.
With regards to an overall investment strategy, to index or not to index, that is the question. Given the reality that approximately 80% of managed funds fail to beat their respective indices in any given year, I think the odds are clear.
Good for you on being ahead of the game, but I wonder what your balance sheet would look like had you factored in the accumulated opportunity costs of the management fees. Also, would that hold up over the total life of the investment rather than the past ten years you've kept track?
But it seems you are satisfied, and at the end of the day, that is the important thing.
it just occured to me , the balances i gave above already reflect lost opportunity costs.
the fact the balance is already lower includes the fact that if you had that money to invest your balance would have been higher in that comparison.. those calculations arent isnt just the bare cost of the fees its also the lost gains on those fees.
i knew it didnt sound right when you were trying to throw additional lost opportunity costs on top of those numbers.
PER 10,000 DOLLARS FOR 30 YEARS AT A LONG TERM AVERAGE OF 8%
You're missing the point. You argued that fees of 1.5% ate up only 1/4-1/3 of the potential gains. That is incorrect because you were not, in fact, considering the opportunity costs. Using the same hypo of 8% gain over 30 years on an investment of $30k, with the 0.07% ER of Vanguard Admiral shares, the final balance becomes $98535.
Your 1.5% ER leaves you a balance of $64000. So that 1.5% cost you $34535 over 30 years. In other words, 54% of the gain you would've gotten on the same investment with the lower ER.
Quote:
Originally Posted by mathjak107
it just occured to me , the balances i gave above already reflect lost opportunity costs.
the fact the balance is already lower includes the fact that if you had that money to invest your balance would have been higher in that comparison.. those calculations arent isnt just the bare cost of the fees its also the lost gains on those fees.
i knew it didnt sound right when you were trying to throw additional lost opportunity costs on top of those numbers.
PER 10,000 DOLLARS FOR 30 YEARS AT A LONG TERM AVERAGE OF 8%
the numbers i posted are inclusive for 30 years for the fee percentages i used....
you can just buy individual stocks and make etf's and vanguard funds appear high . it all depends what you want and what you get .
key word is what you get.
take as an example VTI total market index , expenses .07 it returned the last 3 years 24.65% a year .
dvy ,the darling of wall street .40 expenses returned 25.83% a year the last 3 after expenses .
some of the holdings in the portfolio i used for decades are:
flpsx fidelity low priced stock fund which i own from the day it came out has expenses of .83% and returned 27.55% the last 3 years .
it fact it beat its index over the last 10 years by returning 9.3% a year vs its index at 6.45 and thats after after expenses. over the life of the fund its returned over 14% a year
fdgrx fidelity growth company another long term holding for the newsletter , expenses .83 , returned 28.67 the last 3 years 7.54 the last 10 and 13.01 over its lifetime
for comparison vti total market index returned 5.14% the last 10 years. expenses .07
slightly higher fees never mean the fund isnt worth that extra dough , you just have to make sure your getting something for your money.
no matter what ,your choice of allocations and portfolio construction will destroy any fee saving even assuming you picked the lowest fee funds you can find.
how important is it ?
the newsletter portfolio consisiting of a bunch of middle of the pack funds working together returned during the lost decade 52.4%. thats after fees.
the s&p index was around 6%
this is something anyone can do , there are many newsletters out there with very similiar performance , fidelity insight, fidelity monitor to name a few ,im sure vanguard and etf's have their own too.. in fact i think fidelity monitor beat the one i use but they do have more aggressive models.
getting good results is not just about buying the lowest fee stuff you can find, thats not true at all. its about the total plan and strategy.
by the way a simple mix of
gld
vti
tlt
cash
returned over 9% cagr for almost 40 years now if they were in existance that long. future performance may not do the same , more than likely not but the fact is here is a plan with only 25% in equities and it gave the markets and their volatility a good run for the money barely swinging up or down more than 10% or so..
Last edited by mathjak107; 04-17-2012 at 04:35 AM..
i think 2 of the worst bits of information that circulate financial forums are when its blindly said:
put most of your money in equities , your young
and buy low cost funds and index.
most of these people asking advice are asking because they have no or little knowledge themselves.
they have no idea of their own pain tolerance, they have no clue how investments work and they have no idea about the differences they can expect between indexing and active management.
in the drop in 2008-2009 index funds were basically in a free fall. they had no one to make a decision to protect or cushion the fall.
many who were in index funds jumped ship as losses steepened dramatically ,they had never experienced anything like this .
of course still being in protective mode many managed funds missed the ralley and so they under performed the indexes by years end.
but what the managed funds did do is keep many still in the game as at the peak alot of managed funds were down 1/2 as much as the indexes even though by years end that protective mode hurt them..
investing is not something that can be blurted out to a stranger in a sentance or 2.
its unique to the goals,needs,wants and pain tolerance that each of us have.
its all going to be about finding a working strategy that fits you. that trumps low expenses,indexes and everything else.
a good portfolio does not count on having the lowest fee funds or beating the markets across the board. in fact good portfolio design allows for funds not beating the markets. of course expenses need to be reasonable but they dont have to be the lowest.
in the scheme of things other issues are more in important in my opinion.
low cost funds and indexing are great building blocks for those who understand how to use them but giving good someone good building supplies doesnt mean they know how to build a house or that they will be happy following someone elses design and instructions ..
Last edited by mathjak107; 04-17-2012 at 05:57 AM..
I double checked the expense ratio on the US Stock Index and it is definitely .02. So it would be wise to move what I have in the small and mid-large to this fund or move these funds elsewhere?
Ideally someday I'd like to utilize the option to choose my own stocks/bonds/mutual funds etc...My company offers this level of customization but I'm a bit scared to take the jump until I get a better grasp on everything.
If it were me, I would move the small and mid-large to the US stock index. My own allocation is currently 60% domestic 40% international. When you determine your own comfort level, you should consider the international fund (if it has exposure to emerging markets). Of course, you could stay 100% domestic if the idea of international exposure makes you uneasy.
Quote:
Originally Posted by Mr_Geek
I double checked the expense ratio on the US Stock Index and it is definitely .02. So it would be wise to move what I have in the small and mid-large to this fund or move these funds elsewhere?
Ideally someday I'd like to utilize the option to choose my own stocks/bonds/mutual funds etc...My company offers this level of customization but I'm a bit scared to take the jump until I get a better grasp on everything.
there ya go, excellent answer. perhaps a newsletter to guide you would be a good idea . you can always go off on your own when you understand things more.
the newsletters give you nice balanced models and let you know when to make a swap.
I've been struggling too with the pretax 401k vs Roth K question. Decided to take the 15% I was deferring previously as all pretax 401(k) and just split it goiing forward to 8% pre-tax and 7% Roth-K.
No plan at this time to convert any of my pretax 401k money to Roth(k)....assuming that is an option.
Not sure if it that is the correct formula or not, but at least I'm getting benefits that both offer (and I"m meeting my goal of saving min. of 15% of my income for retirement.
there ya go, excellent answer. perhaps a newsletter to guide you would be a good idea . you can always go off on your own when you understand things more.
the newsletters give you nice balanced models and let you know when to make a swap.
im only familiar with the fidelity ones myself .
Where can I find such newsletters or what should I look for?
Or perhaps I should take a step back first. What can I read to get a better grasp on investing in general before I read the newsletters? Is there a good book that would cover the basics?
Is anyone doing $17K for 401K and $5/k for Roth IRA this year?
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