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Hi all,
Time to revisit this important issue: When two investors earn the same return and sell at the same time, how does one end up $28,194 ahead of the other? How the little things turn out to be very, very significant after 20 years.
click here for article
Evaluating Fund Expenses Why we constantly focus on fees.
#2 Guest_TR1982_*
Posted 03 September 2005 - 09:38 PM
Unfortunately, while this is true in the hypothetical world, there is little research to support the fact that most investors benefit from this. In fact, most of the research demonstrates just the opposite. Most investors are concerned with investment return and, therefore, make investment decisions on that information.
#3 Guest_Sierra_*
Posted 03 September 2005 - 10:35 PM
Most investors are concerned with investment return and, therefore, make investment decisions on that information.
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Except for the millions that take the no-load route.
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Except for the millions that take the no-load route.
#4
Posted 03 September 2005 - 11:04 PM
Steve............Thank you for the article..........cost over time does matter........those of us who are knowledgeable and investing for ourselves, of course, will agree, and as Sierra pointed out includes millions of investors (who live in the real world, of which I am one).
Ira
Ira
#5
Posted 04 September 2005 - 12:15 PM
Hi TR1982,
Thanks for your response. I mean it. My response to you is that you are right because most investors listen to you and other professionals who make claims that they can beat the indices. There is also ample research that says that investors who use low cost funds do better than the the pros.
Steve
Thanks for your response. I mean it. My response to you is that you are right because most investors listen to you and other professionals who make claims that they can beat the indices. There is also ample research that says that investors who use low cost funds do better than the the pros.
Steve
#6 Guest_TR1982_*
Posted 04 September 2005 - 12:36 PM
As usual, any comment I make is met with ad hominem attacks. For those of you who haven't figured things out yet, that's why only about 10 people consistently post to this forum. Dan, if you want this board to be anything other than 10 cranky people who hate anybody and anything who disagree with them, please clean up this crap.
I look forward to watching the next 10 ad hominem attacks that will be posted to this reply. I am sure you all will not disappoint.
I look forward to watching the next 10 ad hominem attacks that will be posted to this reply. I am sure you all will not disappoint.
#7
Posted 04 September 2005 - 02:08 PM
TR
" only about 10 people consistently post to this forum. Dan, if you want this board to be anything other than 10 cranky people who hate anybody and anything who disagree with them, please clean up this crap."
It is noticed that you are a frequent poster, posting on the average of 2.1 posts per day, accounting for over 4 percent of total posts to this forum (eventhough you started posting at the end of April, way after the forum started).
.
" only about 10 people consistently post to this forum. Dan, if you want this board to be anything other than 10 cranky people who hate anybody and anything who disagree with them, please clean up this crap."
It is noticed that you are a frequent poster, posting on the average of 2.1 posts per day, accounting for over 4 percent of total posts to this forum (eventhough you started posting at the end of April, way after the forum started).
.
#9
Posted 04 September 2005 - 02:50 PM
TR..I agree with your first response, that most people go for the better returns..i.e., the higher amount of investment return ($28,194) in the article Steve provides a link to. This is true when they have enough information to see the obvious advantage of a lower fee. How is this hypothetical? Since I have paid closer attention to the advantages of going to the data instead of to an agent these benefits are real for me.
Also, where was the ad hominem attack? Who is being cranky here?
Also, where was the ad hominem attack? Who is being cranky here?
#10 Guest_TR1982_*
Posted 04 September 2005 - 03:21 PM
danrobertson,
This is my concern:
1) sschullo say this: "Thanks for your response. I mean it. My response to you is that you are right because most investors listen to you and other professionals who make claims that they can beat the indices."
Now, did I say "you and other professionals who make claims that they can beat the indices."?
No, I did not say that. Now, if I said that American students can't read and can't perform basic math because they listen to their teachers, would you consider that an ad hominem attack?
BTW, can anyone here point me to or post the research that proves you will have higher investment returns if you have lower expenses? I'd love to see it.
Also, just so you understand what I meant, I have copied the article below.
"How does one investor end up $28,194 ahead?
You'd think that two investors who invest the same amount, for the same time, and earn the same return before expenses, would end up at the same place.
But when their funds' expense ratios aren't the same, a small difference makes a big difference. In this hypothetical comparison, one fund has an expense ratio of 1.3%. The other, 0.3%. Applied to an initial investment of $5,000, with subsequent annual investments of $5,000 returning 8% before expenses and compounded over 20 years, the difference adds up to $28,194.
How high costs affect returns
You will need toDownload Macromedia Flash or upgrade your existing versionto view this data(takes about a minute with a standard modem).
Note: This hypothetical example does not represent any particular investment."
Now, maybe I don't read very well, but could you please make sure you read the last sentence of this article pasted above?
This is my concern:
1) sschullo say this: "Thanks for your response. I mean it. My response to you is that you are right because most investors listen to you and other professionals who make claims that they can beat the indices."
Now, did I say "you and other professionals who make claims that they can beat the indices."?
No, I did not say that. Now, if I said that American students can't read and can't perform basic math because they listen to their teachers, would you consider that an ad hominem attack?
BTW, can anyone here point me to or post the research that proves you will have higher investment returns if you have lower expenses? I'd love to see it.
Also, just so you understand what I meant, I have copied the article below.
"How does one investor end up $28,194 ahead?
You'd think that two investors who invest the same amount, for the same time, and earn the same return before expenses, would end up at the same place.
But when their funds' expense ratios aren't the same, a small difference makes a big difference. In this hypothetical comparison, one fund has an expense ratio of 1.3%. The other, 0.3%. Applied to an initial investment of $5,000, with subsequent annual investments of $5,000 returning 8% before expenses and compounded over 20 years, the difference adds up to $28,194.
How high costs affect returns
You will need toDownload Macromedia Flash or upgrade your existing versionto view this data(takes about a minute with a standard modem).
Note: This hypothetical example does not represent any particular investment."
Now, maybe I don't read very well, but could you please make sure you read the last sentence of this article pasted above?
#11
Posted 04 September 2005 - 04:03 PM
| QUOTE (TR1982 @ Sep 4 2005, 03:21 PM) |
| BTW, can anyone here point me to or post the research that proves you will have higher investment returns if you have lower expenses? I'd love to see it. |
TR, take a look at the article "Are fund expenses too high?" for a summary of recent research by Morningside showing that better returns are associated with lower management fees. It is available in the July 2005 archives of this web site.
Russ
#12
Posted 04 September 2005 - 04:23 PM
Greetings to all. Even the cranky! Would it be fair to say that an investor can only really control two parts of the investment process: (1) investment(s) chosen and (2) fees paid? After all performance measurements are based on the past. Even fixed investment guarantees are subject to change.
Dan Otter
p.s. Per lobewiper's suggestion. The following excerpt comes from: Are Fund Expenses Too High? (free login)
In fact, the expense ratio is not only the best predictor of performance, as Kinnel says, it is the "only" statistically reliable predictor, according to a study by the Boston-based Financial Research Corporation.
FRC tested 11 popular criteria investors use in picking funds: Morningstar ratings, past performance, turnover ratios, asset size, expense ratios, manager tenure and net sales, plus four risk/volatility measures -- standard deviation, alpha, beta and the Sharpe Ratio.
FRC's research showed that the expense ratio was the only reliable predictor. Funds with low operating costs "deliver above-average future performance across nearly all time periods." Conversely, all other criteria were statistically unreliable predictors -- including Morningstar's popular star ratings and the highly-touted Sharpe Ratio that calculates risk-reward variables for investments.
Dan Otter
p.s. Per lobewiper's suggestion. The following excerpt comes from: Are Fund Expenses Too High? (free login)
In fact, the expense ratio is not only the best predictor of performance, as Kinnel says, it is the "only" statistically reliable predictor, according to a study by the Boston-based Financial Research Corporation.
FRC tested 11 popular criteria investors use in picking funds: Morningstar ratings, past performance, turnover ratios, asset size, expense ratios, manager tenure and net sales, plus four risk/volatility measures -- standard deviation, alpha, beta and the Sharpe Ratio.
FRC's research showed that the expense ratio was the only reliable predictor. Funds with low operating costs "deliver above-average future performance across nearly all time periods." Conversely, all other criteria were statistically unreliable predictors -- including Morningstar's popular star ratings and the highly-touted Sharpe Ratio that calculates risk-reward variables for investments.
#13 Guest_TR1982_*
Posted 04 September 2005 - 07:35 PM
Hold on!
Are you telling me that you know which fund will be the top performer in any category for the next 3 years based on the expense ratio? If so, please tell. I will run out and invest every penny I have in those funds. Is there a money back guarantee if you are wrong?
Can you explain to me why over the last 10 years there are 18 funds with higher expense ratios that have better performance than a Vanguard fund in the Large Cap growth category that Morningstar recommends?
That research did not conclude that simply because one fund's expense ratio is lower than another, that therefore it's performance would be better. That is a gross misstatement of this study and of Morningstar's conclusions. I have read Morningstar's article since I subscribe to their Fund Investor magazine.
What it does say (and I agree with the conclusions that Morningstar makes about it) is that low operating costs are a statiscally reliable characteristic of top performing funds. But to suggest that investors get a list of the funds that have the lowest operating cost and use that as their pick list is as naive as taking a list of the top performers and using that as your pick list. None of this research is bullet proof and there is no silver bullet in investing. To suggest otherwise is foolish.
I think any investor would be wise to validate any marketing information that is presented to them (including the Vanguard article referenced in this thread. Remember, there was no substantiating evidence to that marketing piece.) Vanguard has always used low expenses as their schtick, that's ok with me. But that doesn't mean that they are the best choice all the time for all investors in all situations.
Are you telling me that you know which fund will be the top performer in any category for the next 3 years based on the expense ratio? If so, please tell. I will run out and invest every penny I have in those funds. Is there a money back guarantee if you are wrong?
Can you explain to me why over the last 10 years there are 18 funds with higher expense ratios that have better performance than a Vanguard fund in the Large Cap growth category that Morningstar recommends?
That research did not conclude that simply because one fund's expense ratio is lower than another, that therefore it's performance would be better. That is a gross misstatement of this study and of Morningstar's conclusions. I have read Morningstar's article since I subscribe to their Fund Investor magazine.
What it does say (and I agree with the conclusions that Morningstar makes about it) is that low operating costs are a statiscally reliable characteristic of top performing funds. But to suggest that investors get a list of the funds that have the lowest operating cost and use that as their pick list is as naive as taking a list of the top performers and using that as your pick list. None of this research is bullet proof and there is no silver bullet in investing. To suggest otherwise is foolish.
I think any investor would be wise to validate any marketing information that is presented to them (including the Vanguard article referenced in this thread. Remember, there was no substantiating evidence to that marketing piece.) Vanguard has always used low expenses as their schtick, that's ok with me. But that doesn't mean that they are the best choice all the time for all investors in all situations.
#14
Posted 04 September 2005 - 08:26 PM
Hey TR,
I think what this research is saying is that if you take say 10 low-cost funds in a variety of asset classes and put them up against 10 higher cost funds in the exact same asset classes, that the lower-cost funds have a much better chance of out-performing the higher cost funds. The words they use are: "only" statistically reliable predictor. They aren't, as you suggest, giving a guarantee. This is hardly revolutionary. Bogle, Bernstein, Malkiel and many others have been saying and proving this exact notion for years. It's not saying always, it's saying chances are much better. As I said, an investor can only control two aspects of investing (1) the investment(s) they choose; and (2) what they pay for their investments.
Dan Otter
I think what this research is saying is that if you take say 10 low-cost funds in a variety of asset classes and put them up against 10 higher cost funds in the exact same asset classes, that the lower-cost funds have a much better chance of out-performing the higher cost funds. The words they use are: "only" statistically reliable predictor. They aren't, as you suggest, giving a guarantee. This is hardly revolutionary. Bogle, Bernstein, Malkiel and many others have been saying and proving this exact notion for years. It's not saying always, it's saying chances are much better. As I said, an investor can only control two aspects of investing (1) the investment(s) they choose; and (2) what they pay for their investments.
Dan Otter
#15
Posted 05 September 2005 - 11:51 AM
TR,
In all of your postings, what you are saying is that managers can beat the indices by looking at their track record primarily. I have said repeatedly to you and anybody else who makes these misleading claims, that had I known your choices ten years ago, I would have gladly paid the higher expense ratios to get those returns and then when the time came, I would get out and collect those magnificent gains. You know perfectly well that what I just said is impossible because while hindsight is 20/20, looking forward from today is stock market blindness when it comes to picking top winners with guarantees in the future.
Bogle, Bernstein and Malkiel and others have been saying for a long time that managers cannot possible beat the indices ALL THE TIME. Yes, some of them can beat the indices over long periods of time and almost all the managers can beat the indices over a short period of time such as the late 1990s (heck, I had a managed fund, Fidelity Select Electronics, that grew 144% in 1999, OH! I almost forgot to tell you that it was a NO LOAD. Fidelity waived the commission because I work for an employer who has more than 200 employees, pardon my omission). But no single manager can beat the indices ALL THE TIME. Adding to this risk, diversifying the portfolio means adding more managers which increases risk because each one of those managers seeks to beat the indices, all the time.
When investors pay for a manager, they are betting that that one manager will beat the indices. Just looking at simple probably, the fact that there are so many managers and that only 20% beat the averages over a short time anyway, the chances of picking that right manager adds considerable risk to your portfolio. Because then you have to pick the right time to get out. Guess what happened to all of my gains in Fidelity select electronics? I lost almost all of those gains. I did not get out AT THE RIGHT TIME.
It’s about risk, my friend. You are asking us to trust you and other managers to risk OUR money so that you and your friends will have the opportunity to try and beat the averages. That small omission adds unnecessary and costly risk to one's portfolio. The investor is taking all the risk, not you. And besides managing simply does not work consistently over long periods of time according to these great thinkers--Bogle, Bernstein, Malkiel, Swedroe and Ferri. Last I heard, retirement planning with a 403b, 457 and 401k requires long term planning.
For the record, I do have managed funds but they are all in Vanguard and TIAA CREF, which have the lowest expense ratios for managed funds in the industry. FYI, Fidelity is getting there too. I sold the Fidelity Select Fund and transferred it to Vanguard, all in all, I did make about 17% per year in the 7 years I was in that fund. So much for 144%, it’s exciting but at the end of the day, excitement alone does not make a good financial retirement plan.
There are a few financial managers who do respect what these great authors and thinkers have said, but the vast majority does not.
We will never agree on this one but its deserves to be said for newcomers.
Steve
In all of your postings, what you are saying is that managers can beat the indices by looking at their track record primarily. I have said repeatedly to you and anybody else who makes these misleading claims, that had I known your choices ten years ago, I would have gladly paid the higher expense ratios to get those returns and then when the time came, I would get out and collect those magnificent gains. You know perfectly well that what I just said is impossible because while hindsight is 20/20, looking forward from today is stock market blindness when it comes to picking top winners with guarantees in the future.
Bogle, Bernstein and Malkiel and others have been saying for a long time that managers cannot possible beat the indices ALL THE TIME. Yes, some of them can beat the indices over long periods of time and almost all the managers can beat the indices over a short period of time such as the late 1990s (heck, I had a managed fund, Fidelity Select Electronics, that grew 144% in 1999, OH! I almost forgot to tell you that it was a NO LOAD. Fidelity waived the commission because I work for an employer who has more than 200 employees, pardon my omission). But no single manager can beat the indices ALL THE TIME. Adding to this risk, diversifying the portfolio means adding more managers which increases risk because each one of those managers seeks to beat the indices, all the time.
When investors pay for a manager, they are betting that that one manager will beat the indices. Just looking at simple probably, the fact that there are so many managers and that only 20% beat the averages over a short time anyway, the chances of picking that right manager adds considerable risk to your portfolio. Because then you have to pick the right time to get out. Guess what happened to all of my gains in Fidelity select electronics? I lost almost all of those gains. I did not get out AT THE RIGHT TIME.
It’s about risk, my friend. You are asking us to trust you and other managers to risk OUR money so that you and your friends will have the opportunity to try and beat the averages. That small omission adds unnecessary and costly risk to one's portfolio. The investor is taking all the risk, not you. And besides managing simply does not work consistently over long periods of time according to these great thinkers--Bogle, Bernstein, Malkiel, Swedroe and Ferri. Last I heard, retirement planning with a 403b, 457 and 401k requires long term planning.
For the record, I do have managed funds but they are all in Vanguard and TIAA CREF, which have the lowest expense ratios for managed funds in the industry. FYI, Fidelity is getting there too. I sold the Fidelity Select Fund and transferred it to Vanguard, all in all, I did make about 17% per year in the 7 years I was in that fund. So much for 144%, it’s exciting but at the end of the day, excitement alone does not make a good financial retirement plan.
There are a few financial managers who do respect what these great authors and thinkers have said, but the vast majority does not.
We will never agree on this one but its deserves to be said for newcomers.
Steve
