Expense Ratio Math Help

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Topic Author
bck63
Posts: 650
Joined: Fri Sep 28, 2018 4:59 pm

Expense Ratio Math Help

Post by bck63 » Thu Jun 13, 2019 4:54 pm

Can anyone tell me how I would figure out an average expense ratio, given multiple funds with different ERs?

For example, if I have 75% of my portfolio in a fund with an ER of 0.03%, and 25% in a fund with an ER of 0.7%, how would I calculate my average ER?

Thanks for any help that anyone can provide.

Silk McCue
Posts: 3279
Joined: Thu Feb 25, 2016 7:11 pm

Re: Expense Ratio Math Help

Post by Silk McCue » Thu Jun 13, 2019 5:04 pm

(.75 x .03) + (.25 x .7) = .1975

Cheers

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arcticpineapplecorp.
Posts: 4443
Joined: Tue Mar 06, 2012 9:22 pm

Re: Expense Ratio Math Help

Post by arcticpineapplecorp. » Thu Jun 13, 2019 5:10 pm

bck63 wrote:
Thu Jun 13, 2019 4:54 pm
Can anyone tell me how I would figure out an average expense ratio, given multiple funds with different ERs?

For example, if I have 75% of my portfolio in a fund with an ER of 0.03%, and 25% in a fund with an ER of 0.7%, how would I calculate my average ER?

Thanks for any help that anyone can provide.
gladly...
75% =.75,
25% = .25
0.03% = .0003 (3/100ths of 1 %)
0.7% = .007 (7/10ths of 1 %)

so...
(.75 x .0003) + (.25 x .007)=
.000225 + .00175 =

.001975 = 0.1975% which is around 20 bps (basis points) overall or 19/100ths of 1 % (almost 2/10ths of 1%).

Are you absolutely sure your second fund is 0.7% and not 0.07%? The reason I ask is .03% is like a stock index fund and a bond index fund might be around .07%, not 0.7%. (assuming your 75/25??)

If so and your second fund is an e.r. of 0.07% and not 0.7% let us know...or better yet, tell us what you think the overall e.r. would be now that you know how to figure the overall e.r.!

Hint: if it's 0.07% and not 0.7% the e.r. will be much lower!
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

Topic Author
bck63
Posts: 650
Joined: Fri Sep 28, 2018 4:59 pm

Re: Expense Ratio Math Help

Post by bck63 » Thu Jun 13, 2019 5:17 pm

arcticpineapplecorp. wrote:
Thu Jun 13, 2019 5:10 pm
bck63 wrote:
Thu Jun 13, 2019 4:54 pm
Can anyone tell me how I would figure out an average expense ratio, given multiple funds with different ERs?

For example, if I have 75% of my portfolio in a fund with an ER of 0.03%, and 25% in a fund with an ER of 0.7%, how would I calculate my average ER?

Thanks for any help that anyone can provide.
gladly...
75% =.75,
25% = .25
0.03% = .0003 (3/100ths of 1 %)
0.7% = .007 (7/10ths of 1 %)

so...
(.75 x .0003) + (.25 x .007)=
.000225 + .00175 =

.001975 = 0.1975% which is around 20 bps (basis points) overall or 19/100ths of 1 % (almost 2/10ths of 1%).

Are you absolutely sure your second fund is 0.7% and not 0.07%? The reason I ask is .03% is like a stock index fund and a bond fund might be around .07%, not 0.7%.

If so and your second fund is an e.r. of 0.07% and not 0.7% let us know...or better yet, tell us what you think the overall e.r. would be now that you know how to figure the overall e.r.!

Hint: if it's 0.07% and not 0.7% the e.r. will be much lower!
You are THE MAN!! Thank you so much. And so fast! Dude!!

Unfortunately, the second fund is indeed 0.7%, SPHIX, Fidelity's junk bond fund. I am thinking of adding 20-25% to my bond portfolio (Rick Ferri recommends 20%), so I wanted to do the ER math. I know Vanguard's fund is much cheaper, but my bond portfolio (or the part of it not wrapped up in target date and balanced funds) is at Fidelity. It's performance is close to Vanguard's fund (which must mean that, given the higher ER, it takes more risk).

Tough decisions. Thanks again.

User avatar
arcticpineapplecorp.
Posts: 4443
Joined: Tue Mar 06, 2012 9:22 pm

Re: Expense Ratio Math Help

Post by arcticpineapplecorp. » Thu Jun 13, 2019 5:33 pm

bck63 wrote:
Thu Jun 13, 2019 5:17 pm
arcticpineapplecorp. wrote:
Thu Jun 13, 2019 5:10 pm
bck63 wrote:
Thu Jun 13, 2019 4:54 pm
Can anyone tell me how I would figure out an average expense ratio, given multiple funds with different ERs?

For example, if I have 75% of my portfolio in a fund with an ER of 0.03%, and 25% in a fund with an ER of 0.7%, how would I calculate my average ER?

Thanks for any help that anyone can provide.
gladly...
75% =.75,
25% = .25
0.03% = .0003 (3/100ths of 1 %)
0.7% = .007 (7/10ths of 1 %)

so...
(.75 x .0003) + (.25 x .007)=
.000225 + .00175 =

.001975 = 0.1975% which is around 20 bps (basis points) overall or 19/100ths of 1 % (almost 2/10ths of 1%).

Are you absolutely sure your second fund is 0.7% and not 0.07%? The reason I ask is .03% is like a stock index fund and a bond fund might be around .07%, not 0.7%.

If so and your second fund is an e.r. of 0.07% and not 0.7% let us know...or better yet, tell us what you think the overall e.r. would be now that you know how to figure the overall e.r.!

Hint: if it's 0.07% and not 0.7% the e.r. will be much lower!
You are THE MAN!! Thank you so much. And so fast! Dude!!

Unfortunately, the second fund is indeed 0.7%, SPHIX, Fidelity's junk bond fund. I am thinking of adding 20-25% to my bond portfolio (Rick Ferri recommends 20%), so I wanted to do the ER math. I know Vanguard's fund is much cheaper, but my bond portfolio (or the part of it not wrapped up in target date and balanced funds) is at Fidelity. It's performance is close to Vanguard's fund (which must mean that, given the higher ER, it takes more risk).

Tough decisions. Thanks again.
thanks. and your welcome. Glad you're continuing the conversation...

For instance, I'm wondering where you got that Rick recommends 20% junk bonds? I looked it up and found a post about it based on an old book of Rick's but the consensus was that recommendation may have been outdated and occurred when there weren't even the existence of certain funds (he, and bogleheads now recommend like total international stock market index fund for instance). So are you reading an old copy of Rick's books? If so, you might want to be careful. source: viewtopic.php?t=242438#p3797333

I know he recommended around 20% of one's bond holdings in TIPS at one point (and the inflation fighter core-4 portfolio contains TIPS).

Perhaps you could send a PM to Rick (he's a boglehead) or he might chime in on this post.

If you look at his core-4 portfolios that he's recommending (source: https://core-4.com/portfolios/), not a single one of them recommends junk bonds. Generally you take your risk on the stock side of the portfolio and the fixed income side is the ballast of the portfolio. Junk bonds will provide volatility usually at the time you don't want that.

Here's what others have to say about the right percentage of junk bonds in one's portfolio:
viewtopic.php?t=132802
viewtopic.php?t=223952

just want to make sure you're up to date.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

Topic Author
bck63
Posts: 650
Joined: Fri Sep 28, 2018 4:59 pm

Re: Expense Ratio Math Help

Post by bck63 » Thu Jun 13, 2019 5:57 pm

arcticpineapplecorp. wrote:
Thu Jun 13, 2019 5:33 pm
bck63 wrote:
Thu Jun 13, 2019 5:17 pm
arcticpineapplecorp. wrote:
Thu Jun 13, 2019 5:10 pm
bck63 wrote:
Thu Jun 13, 2019 4:54 pm
Can anyone tell me how I would figure out an average expense ratio, given multiple funds with different ERs?

For example, if I have 75% of my portfolio in a fund with an ER of 0.03%, and 25% in a fund with an ER of 0.7%, how would I calculate my average ER?

Thanks for any help that anyone can provide.
gladly...
75% =.75,
25% = .25
0.03% = .0003 (3/100ths of 1 %)
0.7% = .007 (7/10ths of 1 %)

so...
(.75 x .0003) + (.25 x .007)=
.000225 + .00175 =

.001975 = 0.1975% which is around 20 bps (basis points) overall or 19/100ths of 1 % (almost 2/10ths of 1%).

Are you absolutely sure your second fund is 0.7% and not 0.07%? The reason I ask is .03% is like a stock index fund and a bond fund might be around .07%, not 0.7%.

If so and your second fund is an e.r. of 0.07% and not 0.7% let us know...or better yet, tell us what you think the overall e.r. would be now that you know how to figure the overall e.r.!

Hint: if it's 0.07% and not 0.7% the e.r. will be much lower!
You are THE MAN!! Thank you so much. And so fast! Dude!!

Unfortunately, the second fund is indeed 0.7%, SPHIX, Fidelity's junk bond fund. I am thinking of adding 20-25% to my bond portfolio (Rick Ferri recommends 20%), so I wanted to do the ER math. I know Vanguard's fund is much cheaper, but my bond portfolio (or the part of it not wrapped up in target date and balanced funds) is at Fidelity. It's performance is close to Vanguard's fund (which must mean that, given the higher ER, it takes more risk).

Tough decisions. Thanks again.
thanks. and your welcome. Glad you're continuing the conversation...

For instance, I'm wondering where you got that Rick recommends 20% junk bonds? I looked it up and found a post about it based on an old book of Rick's but the consensus was that recommendation may have been outdated and occurred when there weren't even the existence of certain funds (he, and bogleheads now recommend like total international stock market index fund for instance). So are you reading an old copy of Rick's books? If so, you might want to be careful. source: viewtopic.php?t=242438#p3797333

I know he recommended around 20% of one's bond holdings in TIPS at one point (and the inflation fighter core-4 portfolio contains TIPS).

Perhaps you could send a PM to Rick (he's a boglehead) or he might chime in on this post.

If you look at his core-4 portfolios that he's recommending (source: https://core-4.com/portfolios/), not a single one of them recommends junk bonds. Generally you take your risk on the stock side of the portfolio and the fixed income side is the ballast of the portfolio. Junk bonds will provide volatility usually at the time you don't want that.

Here's what others have to say about the right percentage of junk bonds in one's portfolio:
viewtopic.php?t=132802
viewtopic.php?t=223952

just want to make sure you're up to date.
Lots to think about and I will read each of those threads. One of my thoughts was to mimic Fidelity's Total Bond Fund (not an index fund) which adds high-yield, emerging market, and increased corporate. It consistently outperforms the total bond index fund.

I have read and seen multiple statements from Rick Ferri that he adds 20% high yield bonds to his fixed income portfolio. Here is a video with Christine Benz from 2014 (at the Boglehead's conference), but he certainly may have changed his mind. He begins discussing junk bonds at 3:15.

https://youtu.be/1zAinNa9c5A

The part of me that has been learning about Boglehead investing for the last couple of years says just stop trying to get fancy, and stay boring in good, low-cost index funds. I appreciate you giving me information and helping me out.

Just as an aside, I've come a long way learning from Jack Bogle and the Bogleheads. I have sold all my individual stock positions and am currently in nothing but index funds. Should probably just, as Mr.Bogle would say, stay the course. So grateful for everything I've learned.

Topic Author
bck63
Posts: 650
Joined: Fri Sep 28, 2018 4:59 pm

Re: Expense Ratio Math Help

Post by bck63 » Thu Jun 13, 2019 6:10 pm

Silk McCue wrote:
Thu Jun 13, 2019 5:04 pm
(.75 x .03) + (.25 x .7) = .1975

Cheers
I didn't see your post before silk. Thank you!

Silk McCue
Posts: 3279
Joined: Thu Feb 25, 2016 7:11 pm

Re: Expense Ratio Math Help

Post by Silk McCue » Thu Jun 13, 2019 6:17 pm

bck63 wrote:
Thu Jun 13, 2019 6:10 pm
Silk McCue wrote:
Thu Jun 13, 2019 5:04 pm
(.75 x .03) + (.25 x .7) = .1975

Cheers
I didn't see your post before silk. Thank you!
Happy to help. I figured you just missed it.

Cheers

ccieemeritus
Posts: 628
Joined: Thu Mar 06, 2014 10:43 pm

Re: Expense Ratio Math Help

Post by ccieemeritus » Thu Jun 13, 2019 8:01 pm

I think it's more enlightening to talk about the $ amount rather than the ER.

Lets say you have a $100,000 portfolio.

75% of that ($75,000) is in a fund with a 0.03% ER. 0.03% means your annual expense is 0.0003 x $75000 = $22.5 dollars per year.
25% of that ($25,000) is in a fund with a 0.7% ER. 0.7% means your annual expense is 0.007 x $25000 = $175 dollars per year.

Total expense: $197.5 per year on a $100,000 overall fund. Which matches the 0.1975% overall expense ratio others calculated.

Of course, you need to size the expense up or down depending on the actual size of your portfolio.

Topic Author
bck63
Posts: 650
Joined: Fri Sep 28, 2018 4:59 pm

Re: Expense Ratio Math Help

Post by bck63 » Fri Jun 14, 2019 5:45 am

ccieemeritus wrote:
Thu Jun 13, 2019 8:01 pm
I think it's more enlightening to talk about the $ amount rather than the ER.

Lets say you have a $100,000 portfolio.

75% of that ($75,000) is in a fund with a 0.03% ER. 0.03% means your annual expense is 0.0003 x $75000 = $22.5 dollars per year.
25% of that ($25,000) is in a fund with a 0.7% ER. 0.7% means your annual expense is 0.007 x $25000 = $175 dollars per year.

Total expense: $197.5 per year on a $100,000 overall fund. Which matches the 0.1975% overall expense ratio others calculated.

Of course, you need to size the expense up or down depending on the actual size of your portfolio.
Yikes! $175 per year for 25% of my bond portfolio vs $22.50 per year for 75% of the portfolio.

I was attracted to the Boglehead philosophy because of simplicity, but I keep getting pulled toward complexity. Gonna stick with the US Total Bond Fund (FXNAX) and stay away from the High-Yield (and high expense) fund.

Thanks very much. PS I was doing the ERs from memory. The FXNAX fund ER is actually 0.025%, not 0.03%. Even better!

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