Need a Piece of Evidence on the Boglehead Strategy

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Travis1
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Need a Piece of Evidence on the Boglehead Strategy

Post by Travis1 »

Hey Everyone,

I received some very thoughtful responses to a question I asked last time about moving mine and my wife's portfolio from an adviser that charges a 1% fee to Vanguard. This person also I'm just finding out has us invested in funds with a load of 5.75% on average, which I'm assuming we pay on top of all other costs (is this true? If so, unbelievable!). My wife is resistant to this idea, stating quite clearly that we've done pretty well so why make a change.

She has given me an opening, and has asked me for a resource that explains why moving their and investing in index funds (specifically the three fund strategy) is the wise move for us. Does anyone have a resource (preferably an article) by a proven source (not a forum, no offense) that could swing her to my side. Thus far mathematics and simplicity haven't worked, though they may not have been framed as well as possible.

It would be very much appreciated!
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BTDT
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by BTDT »

The Little Book of Common Sense Investing by John Bogle is one of the best resources I know of. I also highly recommend The Boglehead's Guide to Investing.

Taylor's Gems in the BH wiki provides extracts/gems from many of the best books on investing. The BH Wiki is also a great resource.
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longinvest
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Investing in Total Markets

Post by longinvest »

Investing in Total Markets, by John Norstad

http://www.norstad.org/finance/total.html
The arguments for investing in total markets are based on market history, simple arithmetic, and financial theory.

Many people feel that the strongest arguments for investing in total markets are based on market history. Innumerable studies have shown that individual investors and even professionals like institutional fund managers and mutual fund managers have terrible track records trying to beat the market. For example, many studies have shown that total-market index mutual funds consistently outperform most actively managed mutual funds.

It is easy to see why most actively managed mutual funds must fail to beat their passive total-market index fund counterparts. The performance of "the market" is nothing more or less than the capitalization-weighted average of the performance of all the investors in the market. If some active managers outperform, other active managers must underperform. For every winner (a performer above the average), there must be a loser (a performer below the average). This is a matter of simple arithmetic. Index funds match the market's performance minus their low expenses. Actively managed funds have considerably higher expenses than index funds because they must pay for expensive research into individual securities and sectors, and they must pay extra costs for frequent trading of individual securities. As a consequence, the average performance of all actively managed mutual funds must trail the performance of total-market index mutual funds by the significant difference in their expenses. John Bogle has done many studies that confirm that this is exactly what happens in practice.
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mxs
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by mxs »

Just a thought on performance...

Not sure if this is how companies calculate performance, but I suspect it is true. I would guess when you get statements saying that your portfolio has x%, that is based on the numbers after the load has been taken out. So if you put $100 in, but they have 5% load, then only $95 actually goes in, and performance is based on $95, not the $100 you put in. 10% on $95 is $9.5, or $104.5 total after performance but $104.5 is only 4.5% on the $100 you actually spent.

Someone please correct me if the above is not accurate.
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Taylor Larimore
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by Taylor Larimore »

Travis1 wrote: This person also I'm just finding out has us invested in funds with a load of 5.75% on average, which I'm assuming we pay on top of all other costs (is this true? If so, unbelievable!).
Travis:

It's true. Your investment loses 5.75% even before it is invested. For the adviser to charge another 1% fee is unconscionable. No knowledgeable investor purchases load funds anymore. The fact that you are "just finding out" is a big red flag about your "adviser."

This is what experts say about "costs":
American Association of Individual Investors: "Funds with loads, on average consistently underperform no load funds when the load is taken into consideration."

Frank Armstrong, author of The Informed Investor: "Wrap fee accounts may be great for the ego, but they're bad economics."

Bear amd Gensler, co-authors of The Great Mutual Fund Trap: Many of the costs of investing are practically invisible--you never have to write a check to anyone for fees or commissions."

Bill Bernstein, PhD, Md, adviser and author of The Four Pillars of Investing: "Make no mistake about it, you are engaged in a brutal zero-sum contest with the financial industry. Every penny of commissions, fees, and transactional cost they extract is irretrievably lost to you."

Jack Bogle: "You get to keep exactly what you don't pay for."

Bogleheads' Guide to Investing: "We are accustomed to believing that the more we pay for something, the more we receive. Sorry; this is not how it works when buying mutual funds. Every dollar we pay in commissions, fees, expenses, and so on is one dollar less that we receive from our investment."

John Brennan, former Vanguard CEO and author of Straight Talk on Investing: "You should care about expenses because they directly reduce the return you receive. It's as simple as that."

Eugene Fama, Jr., Vice President of Dimensional Fund Advisers: "One must conclude that in general a manager's fee, and not his skill, plays the biggest role in performance. The higher the fee, the lower the performance."

Rick Ferri, adviser and author of six financial books: "Let's face it: Most investment companies are in business to make money from you, not for you. Every dollar you save in commissions and fee expenses goes right to your bottom line."

Financial Research Corporation did a study to find out which mutual fund predictor really worked: Morningstar Ratings; past performance; expenses; turnover; manager tenure; net sales; asset size; alpha; beta; standard deviation and the Sharpe Ratio. They concluded: "The expense ratio is the only reliable predictor of future mutual fund performance."

Arthur Levitt, former Chairman of the U.S. Securities and Exchange Commission: "The deadliest sin of all is the high cost of owning some mutual funds. What might seem to be low fees, expressed in tenths of 1%, can easily cost an investor tens of thousands of dollars over a lifetime."

Lipper Inc.: In 2012 the average expense ratio for Vanguard funds was 0.19%, which is one-sixth the average funds' expense ratio of 1.11%

Professor Burton Malkiel, author of "A Random Walk Down Wall Street": "Many financial services companies make every effort to obscure the total costs you are actually paying. Every extra dollar of expense you pay is skimmed from your investment capital.

Morningstar: "If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds."

Jerry Tweddell and Jack Pierce, authors of Winning with Index Mutual Funds: "Don't assume that because you pay more, you get more. Unlike just about any other business, it's backward on Wall Street: The more you pay for services, the lower your returns are likely to be."

United States Securities and Exchange Commission: "Independent studies show fees and expenses can be a reliable predictor of mutual fund performance."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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kenyan
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by kenyan »

mxs wrote:Just a thought on performance...

Not sure if this is how companies calculate performance, but I suspect it is true. I would guess when you get statements saying that your portfolio has x%, that is based on the numbers after the load has been taken out. So if you put $100 in, but they have 5% load, then only $95 actually goes in, and performance is based on $95, not the $100 you put in. 10% on $95 is $9.5, or $104.5 total after performance but $104.5 is only 4.5% on the $100 you actually spent.

Someone please correct me if the above is not accurate.
I think that, generally speaking, companies are allowed to report performance without respect to loads. Morningstar reports performance in the same way - loads are ignored (meaning your performance is significantly worse than reported if you're paying a load). With the company my wife's employer plan uses, I know that you have to specifically click a couple of boxes in order to see the effect of the load on our returns - the default options ignore the sales charges. In other words, I do believe that fund companies do everything in their power to obfuscate the effects of loads, and the legal obligation must just be that they have to make post-load data available.
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kenyan
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by kenyan »

Also, I'm in full concurrence with Taylor that it's mind-boggling that your adviser is charging you both a 5.75% load and a 1% AUM (assets under management) fee. That's on top of whatever recurring expenses there are in the funds you're in, which are also doubtless higher than you could get at Vanguard or elsewhere. You need to run far away from this individual. You can easily beat his returns (net of fees) by investing in similar index funds, and even if you're not comfortable investing on your own, you can easily find much lower-cost advisers out there.
Retirement investing is a marathon.
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goingup
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by goingup »

A cornerstone of the Boglehead philosophy is to use low-cost funds, often index funds. Costs have a corrosive effect on your portfolio value. Here's an article from the SEC showing the effect of costs on a portfolio: http://www.sec.gov/investor/alerts/ib_fees_expenses.pdf

This interactive tool from Vanguard shows how portfolio values are affected by fund costs https://personal.vanguard.com/us/insigh ... about-cost
Fallible
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by Fallible »

Travis1 wrote:Hey Everyone,

I received some very thoughtful responses to a question I asked last time about moving mine and my wife's portfolio from an adviser that charges a 1% fee to Vanguard. This person also I'm just finding out has us invested in funds with a load of 5.75% on average, which I'm assuming we pay on top of all other costs (is this true? If so, unbelievable!). My wife is resistant to this idea, stating quite clearly that we've done pretty well so why make a change.

She has given me an opening, and has asked me for a resource that explains why moving their and investing in index funds (specifically the three fund strategy) is the wise move for us. Doaes anyone have a resource (preferably an article) by a proven source (not a forum, no offense) that could swing her to my side. Thus far mathematics and simplicity haven't worked, though they may not have been framed as well as possible.

It would be very much appreciated!
The simple mathematics of costs alone should be convincing, even just the load and AUM compared to Vanguard and indexing. Does she understand how these lower returns?

As for a proven resource beyond the forum, I agree with the recommendation here to read John Bogle's "The Little Book Of Common Sense Investing" and then check out the wiki's reading list. And be sure to read Taylor's "Gems" posted here.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
dad2000
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by dad2000 »

I know there have been some reading recommendations. I thought I'd throw in a video alternative.

Though it's not the overall best documentary on the subject, there is a segment at around 23:30 with Jason Zweig followed by John Bogle that gets the point about fees and active management across: http://www.pbs.org/wgbh/pages/frontline ... nt-gamble/

After the Bogle segment, the producers asked some firms pushing the higher costs to justify their approach, but their responses were far from confident IMHO.
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by heyyou »

To better see what your adviser is doing, learn about the loads and annual expense ratios on different classes of shares of the same mutual fund, and look at your fund symbols to see in which share classes he has invested your savings. That info is in the prospectus and the annual reports that are sent to you. The A shares have the biggest loads, and the adviser shares have the larger annual fees because there is a .25% annual kickback to the seller for the entire time that you own the shares. Not sure which share class it is, but one of them has a load when you sell it, thus allowing the adviser to say there is no load when it is purchased.

Note that Vanguard does not sell adviser shares but Fidelity does. Jack Bogle is worth several million dollars but Ned Johnson, the founder of Fidelity was worth 3 billion dollars, when the businesses were of a similar size. Fidelity catered to the fund sellers, such as your advisor, while Mr. Bogle did what was best for the fund buyers. Many advisers would not sell Vanguard shares due to the lack of commissions paid to the seller.

Most of us here are veterans of expensive advisers. The sad joke about high priced advisers from one of our esteemed authors is "That adviser helped me to put two kids through college, but it was his two kids."
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by JW-Retired »

Travis1 wrote: I received some very thoughtful responses to a question I asked last time about moving mine and my wife's portfolio from an adviser that charges a 1% fee to Vanguard. This person also I'm just finding out has us invested in funds with a load of 5.75% on average, which I'm assuming we pay on top of all other costs (is this true? If so, unbelievable!). My wife is resistant to this idea, stating quite clearly that we've done pretty well so why make a change.
If the advisor is charging a 1% AUM fee it's possible that the loads were not charged. It's up to the advisor if the loads are waived. He/she takes your $10,000, keeps $575, and invests the rest. Or not. I would try to be certain loads were charged before you confront him. Can you deduce this from your statements? I think typically loads are charged when you first invest in the fund or the fund family, and then additional investments to the same funds are not loaded. I also think quite a few advisors charge either an AUM fee or loads but not both.

Anyway, a 1% AUM fee on top of highish expense funds is plenty reason to flee.
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by Thomas Hunt Morgan »

dad2000 wrote:I know there have been some reading recommendations. I thought I'd throw in a video alternative.

Though it's not the overall best documentary on the subject, there is a segment at around 23:30 with Jason Zweig followed by John Bogle that gets the point about fees and active management across: http://www.pbs.org/wgbh/pages/frontline ... nt-gamble/

After the Bogle segment, the producers asked some firms pushing the higher costs to justify their approach, but their responses were far from confident IMHO.
Thank you for passing that PBS link along. Even though I've heard it a million times, the erosion of capital from compounding fee still evokes astonishment: a 2% fee over 5 decades erodes 63% of your returns. AS JCB says, you provide 100% of the capital, assume 100% of the risk for 1/3 of the profits. Long may he live.
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by dratkinson »

Read The Arithmetic of Active Management: http://web.stanford.edu/~wfsharpe/art/active/active.htm . A simple to understand article written by William Sharpe, Nobel laureate in economics, and derived from his award-winning work in the late '60s.

Loads, management fees, and high expense ratios are why active management under-performs the total market. And if used in a taxable account, then high turnover ratio also increases taxes paid. This is why the average active investor, after all costs, under-performs the market by 4-5%/year.

Your wife believes you've been doing okay. Get rid of, or reduce, above costs and you'll do better. This is what passive total-market investing does for you.



Edit.
Last edited by dratkinson on Tue Jul 28, 2015 3:00 pm, edited 2 times in total.
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Taylor Larimore
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The Three Fund Portfolio

Post by Taylor Larimore »

She has asked me for a resource that explains why moving there and investing in index funds (specifically the three fund strategy) is the wise move for us.
Travis:

This Forum Conversation will answer her request: The Three Fund Portfolio

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Travis1
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by Travis1 »

Thanks all.

The resources (and advice) are much appreciated. We will be going through a few of them together to see what we can come up with.

In addition, she's asked me to reach out to one of her well to do family members (an uncle) to run my "theories" by him. I'm confident based on my exposure to this forum over the past few weeks, that I will be able to clearly explain the benefits of what I'm suggesting. Maybe he might even learn something, who knows. If anyone wants to suggest what I should lead with, I'm listening!

Will update you all on how it goes.
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by mickens16 »

So she wasn't convinced that if you put $100,000 in with that FA that almost $6000 would be taken off the top for front end loads? In addition, this doesn't even count the 1% FA fees that are paid yearly. Hopefully she sees the light and decides to move to Vanguard.
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Specific funds recommended?

Post by Taylor Larimore »

Travis:

It would be interesting and helpful to know the funds in your portfolio that this "adviser" has recommended. Give the Ticker Symbols. Also, how long has each fund been held?

Thank you
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
mxs
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by mxs »

I just wanted to say good luck to you. I was in a somewhat similar situation when I first read Common Sense on Mutual Funds by Bogle, and I had a little bit of convincing to do at home to get our Roth IRA's changed over. I don't know if I convinced my wife with knowledge or just wore her down, but all you can do is collect the facts and present them to her, and she will have to decide whether she trusts you or not. Hopefully your relative is knowledgeable in this area and isn't just someone who has a great income/inheritance and poor investing habits.
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by abuss368 »

Travis1 wrote:Hey Everyone,

I received some very thoughtful responses to a question I asked last time about moving mine and my wife's portfolio from an adviser that charges a 1% fee to Vanguard. This person also I'm just finding out has us invested in funds with a load of 5.75% on average, which I'm assuming we pay on top of all other costs (is this true? If so, unbelievable!). My wife is resistant to this idea, stating quite clearly that we've done pretty well so why make a change.

She has given me an opening, and has asked me for a resource that explains why moving their and investing in index funds (specifically the three fund strategy) is the wise move for us. Does anyone have a resource (preferably an article) by a proven source (not a forum, no offense) that could swing her to my side. Thus far mathematics and simplicity haven't worked, though they may not have been framed as well as possible.

It would be very much appreciated!
Hi Travis1,

The bedrock of the Boglehead philosophy is low cost index funds, staying the course, own the market, and keeping investing simple.

I would recommend a few good books on investing before selecting new funds.

Here are a few of my excellent choices:

1) Jack Bogle - "The Little Book of Common Sense Investing".

2) Jack Brennan - "Plain Talk on Investing"

3) The Bogleheads - "Guide to Investing" and "Guide to Retirement"

You will have a much better understanding. In fact, you may be surprised that investing really can be that easy!

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by Grt2bOutdoors »

You asked for a piece - would an article from Time Magazine suffice? If the largest pension fund in the country is embracing index investing, why shouldn't the little guy follow the smart money? :D http://time.com/3397072/index-funds/

Here's a more recent article talking about pension funds catching on to the "benefits of indexing": http://www.nytimes.com/2015/03/04/busin ... .html?_r=0
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by lack_ey »

It's not sufficient to show that indexing on average does better after costs and fees. People don't believe that they're selecting the average actively managed mutual funds. They all think they're going to select above-average ones.

Some people may never be convinced that they don't have a certain tell here, especially if they've been successful for years in the past. And really, separating luck from skill here is very difficult in a traditional statistical sense. It's possible that somebody knows the secret.

It is also the reality that not everybody knows the secret, papers claiming to have found one tend to be much less definitive under more scrutiny (e.g. see "active share"), experts at publications like Morningstar don't seem to have much success either (exhibit A, exhibit B), etc.

Many people do select funds based on prior track records, but the data there is somewhat clear that fund outperformance is highly random, persistence low, and possibly even cyclical (what does well in some few years will more likely underperform later, perhaps even if over the long run it does better than average). Check the SPIVA reports like this and this, a paper from Vanguard here, and other such publications. As many point out, fund costs predict future performance better than past performance does.

Also, markets evolve over time and what may work at some point may not necessarily work in the future. On the other hand, what hasn't worked in the past might theoretically work in the future.
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by BolderBoy »

Travis1 wrote:I received some very thoughtful responses to a question I asked last time about moving mine and my wife's portfolio from an adviser that charges a 1% fee to Vanguard. This person also I'm just finding out has us invested in funds with a load of 5.75% on average
For the moment, ignore the 5.75% upfront cost and focus just on the 1% fee. Take a look at this website calculator and see what the long term, real *costs* are of having this great "advice" from your FA:

Effect of expenses (costs) on portfolio over time:
http://www.calcxml.com/do/inv12

Plug in the 1% cost and a typical VG cost of 0.1% and see the difference - over 30 years you lose 22% of your total investment to the 1% fee you are being charged each year, vs only losing 1% to VG over the same period of time.

Toss in the 5.75% upfront loss and pull out your crying towel.
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by lack_ey »

^ Yes, but if the pre-fee alpha is over ~1% a year there's no reason not to go that route.
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by 53timr »

I don't think one piece of evidence will do the job. I would buy her the book The Bogleheads' Guide to Investing. Ask her to read it and agree that you will both sit down and have a discussion about investing afterwards. Don't try to force the Boglehead philosophy of investing on her. Allow her to come to her own decision. It is obvious from your description that she feels safe and comfortable with your current investment advisor and she needs to feel safe and comfortable with going it alone. It may take some time. Investing can be a very emotional process for many women.
“I take my investment advice from my dentist, because he’s just as likely to lose me money as a financial advisor.” | ― Jarod Kintz, This Book Title is Invisible
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by JDaniels »

How long do you plan to invest? 10, 20, 40 years? Try finding an advisor who has beaten the average by over 6% for those years to offset those fees. I doubt you'll find one.
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by alex_686 »

kenyan wrote:I think that, generally speaking, companies are allowed to report performance without respect to loads. Morningstar reports performance in the same way - loads are ignored (meaning your performance is significantly worse than reported if you're paying a load).
Working off the prospectus and annual report.....

In the growth of 10k chart they must show the impact of the fund's load and expenses.

In the 1, 5, and 10 year they must show the impact of fund's expenses but not the load.

I think this make intuitive sense. You may have held the fund for longer than 1, 5, or 10 years. There are ways to buy into the fund and not pay the load. You should not show account level expenses. It would be next to impossible to display those accurately without a huge amount of information about the individual account.

FYI, for your wife's account - do you get charged when you transfer between funds? Most of the time this fee is waived, which ties back into how hard it is to calculate returns.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by heyyou »

Here, we champion index funds, but that is because of their low costs of owning a broadly diversified group of stocks. If some other method had the same benefit at the same low costs, that would work too, but there hasn't been one, so far. Here, we relish that we get average market returns for decades, with very small fees deducted, and that is available to everyone who chooses to invest that way. So many competitive investors are looking for an edge and they often fail, while we are looking for average with the smallest fees. It is a significant shift from being competitive.
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Taylor Larimore
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by Taylor Larimore »

Travis:

You may be interested to learn that the August, 2015 issue of Money magazine reported:
"Index Funds had a fabulious year last year. Vanguard's flagship Total Stock Market Index Fund earned 12.4%, vs. an average of 7.8% for domestic stock funds."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by Lafder »

Rather than discussing thoretical costs, why don't you start a new thread and post your entire portfolio like this viewtopic.php?f=1&t=6212

It asks you to list Expense ratios, and if you list the size of your accounts folks here can calculate exactly your annual fees in your current portfolio vs what you could be paying if you make a change.

Taxable accounts may incur capital gains tax to sell so it might not be worth changing your entire portfolio.

Yes up front load fees literally mean they take that % off the top. Think of it like paying a fee to "exchange" 100 to foreign currency. You get back 100$- fees in the new currency. And yes it is really disgusting. But, it is absolutely not a secret ! All funds are required to list their fees and expenses including front end and back end loads. I am quite sure your funds list all of the fees, you and your wife are just like most people and did not find the explanations and fees buried in the plan documents.

For your wife, or any male shoppers out there too :), I feel like it is going to the store and insisting on paying full price when the sale price is also listed, to have high fee funds ! Sale priced funds with low fees are there, you just have to look for them.

I am glad you are making this realization now, you can greatly improve your future returns simply by reducing the fees many fold!

lafder
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by mhalley »

You might run your portfolo through https://www.portfoliovisualizer.com/bac ... sisResults and see whether your portfolio beat the three fund portfolio.
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by BigOil »

You have received excellent responses! I think two other points that are critical to keep in context and your conversations.

1) Your "Advisor" is not a fiduciary. They do not have your best interest at heart. There are discussions about changing to fiduciary standard. But this has not happened yet. There are powerful resistors in the market. Including individual investors who do not like to see explicit fees. They prefer them buried. Sorta like a car payment.

Would you go to an Attorney got a fine reduced to $10,000 from $50,000, and received an additional $5000 dollars in fees as a result that are not clearly disclosed as a conflict; rather than going to an Attorney-functioning IN your interest- negotiates a $1000 he/she knows is typical if argued for carefully.

It is appalling that people take their life savings, go to a SALESPERSON , that only sells a certain type or type of product and then ask him what the best way to accomplish their goal is. The "best way" are products making him or her the most money. And still keeping you happily ignorant.

2) Do not confuse using index funds, with results. People will filter their information. And many otherwise smart people tend to believe they are above average you can beat the market. The correct decision does not guarantee superior results. It does guarantee average results. It is culturally counterintuitive to strive for average. There are untold millions upon millions of dollars convincing people softly and barely legally that their fund is smarter than the market.

Your wife or your relatives can look back at a fund with a track record that beats index funds--- in their mind you missed an opportunity. Of course that is ex ante and irrelevant information... Be ready.
alex_686
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Joined: Mon Feb 09, 2015 1:39 pm

Re: Need a Piece of Evidence on the Boglehead Strategy

Post by alex_686 »

I would turn the tables.

First, do you understand the difference between the performance attribution of beta (market) and alpha (manger skill)? I assume you do. If not, post back.

Say that you can get beta at a rock bottom price from index funds. Expense ratios don't lie.

Then ask her how she is going to generate alpha? How will she tell the different between skill and luck? What type of differences will pop up between her performance and your chosen benchmark?

If she balks, remind her that she is a saleswoman that is trying to sell you a expensive product. That you have no objections to paying high fees if it delivers high value. However, the responsibility is on the saleswoman to show her value, not for you to show yours. She has to prove that the 1% to 2% yearly fees are worth it.

(FYI, I tend to be pro investment advisor and I really do believe in the statement that I just wrote. I think the good ones add much more value than their fees. However, advisors that try to pull this type of crap……)
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Travis1
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by Travis1 »

Thanks again for all of the responses. The discussion with the relative went very well. When I mentioned the load funds, he groaned.

At the end of the conversation I asked if he could go back in time to when he was my age, what would he do. He said he would find low cost, diversified funds and dollar cost average into them so he didn't have to watch the market every day like he's always done.

Sound familiar?

I should be posting for portfolio guidance soon, but I have questions before I do; does anyone have any advice for switching companies? I have money in a Roth IRA for myself and my wife. And then we have roughly 10k in a taxable account (funds MDDVX and FAGAX).

I'm hoping to use the taxable account money to do a backdoor Roth with Vanguard. Which brings me to my second question; if my wife has already contributed $1,500 to her Roth (and we are above the income limit), and I'm moving that money to a different company, how do I go about making the backdoor Roth work? Do I have the company now transfer that out of the Roth, or do I ask vanguard to do it?

Thanks so much!
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meowcat
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Re: Need a Piece of Evidence on the Boglehead Strategy

Post by meowcat »

Thomas Hunt Morgan wrote:
dad2000 wrote:I know there have been some reading recommendations. I thought I'd throw in a video alternative.

Though it's not the overall best documentary on the subject, there is a segment at around 23:30 with Jason Zweig followed by John Bogle that gets the point about fees and active management across: http://www.pbs.org/wgbh/pages/frontline ... nt-gamble/

After the Bogle segment, the producers asked some firms pushing the higher costs to justify their approach, but their responses were far from confident IMHO.
Thank you for passing that PBS link along. Even though I've heard it a million times, the erosion of capital from compounding fee still evokes astonishment: a 2% fee over 5 decades erodes 63% of your returns. AS JCB says, you provide 100% of the capital, assume 100% of the risk for 1/3 of the profits. Long may he live.
63% would be subtracted from the entire portfolio, not just the returns. imagine retiring with only $370k, meanwhile, your adviser has robbed you of $630k!! :shock: Unfortunately, most unaware investors don't understand what a itsy bitsy, teeny tiny little 2% can do to their financial future.
What the bold print givith, the fine print taketh away. | -meowcat
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