[Poll] How Much Will Investment Fees Reduce Your End Wealth?

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1) See the table below, 2) select your cost ratio and remaining time horizon, 3) then vote!

0% to -2%
19
17%
-2% to -4%
22
19%
-4% to -8%
40
35%
-8% to -12%
14
12%
-12% to -20%
9
8%
-20% to -40%
1
1%
More than -40%
2
2%
Too confusing
8
7%
 
Total votes: 115

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SimpleGift
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[Poll] How Much Will Investment Fees Reduce Your End Wealth?

Post by SimpleGift » Wed Jul 31, 2013 11:16 am

Image
Kindly guesstimate or roughly interpolate between categories, as needed. Thank you for voting.
Source: Vanguard

Note: These percentage impacts on ending wealth are entirely independent of your portfolio returns. For example, even with very high returns over time, the payments to your investment provider will rise proportionately with the amount of your assets — since the fees are based on assets and not returns.

Question: Is the cumulative impact on your final wealth a surprise to you? Or about as you expected?
Cordially, Todd

dbr
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by dbr » Wed Jul 31, 2013 11:21 am

People should not forget to increase investment fees by adding to the ER an estimate of inside the fund trading costs that are not in the ER. That could be as low as a few hundredths of a percent for low turnover index funds up to an additional 1% or more for high turnover active funds. Turnover in bond index funds may be less expensive than turnover in stock funds?

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by IlliniDave » Wed Jul 31, 2013 11:45 am

Conservatively about 5% for me (20 years .25%). That reflects only by current accounts at VG. In my 401 my overall ER is appreciably lower, about a fourth or fifth of what I'm paying at VG, and the balance is 8X my VG balance, so I overestimated. What I don't want to know is how much I've already given up in the prior 25 years. Water under the bridge as they say.
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Hub
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by Hub » Wed Jul 31, 2013 11:50 am

dbr wrote:People should not forget to increase investment fees by adding to the ER an estimate of inside the fund trading costs that are not in the ER. That could be as low as a few hundredths of a percent for low turnover index funds up to an additional 1% or more for high turnover active funds. Turnover in bond index funds may be less expensive than turnover in stock funds?
I don't understand this well. How do you estimate it?

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Garco
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by Garco » Wed Jul 31, 2013 12:15 pm

Too confusing a question, and it's based on some unknown or unknowable facts.

Does it include the named expenses (and ER's) associated with each holding? (knowable)

Does it include (perhaps hidden) management fees by the company offering IRA's, 401k's, etc.? (this is mostly UNknown).

Does it include transaction or trading fees on equities in taxable accounts? (knowable).

Does it include fees paid to an investment advisor or financial planner? (knowable). BUT suppose you have a very good financial planner who helps you to make good decisions from both a total return and tax management perspective? The impact on my "end wealth" depends not just on the fee (e.g., 1% of my holdings per annum), but also on the performance of my account relative to what would occur if I tried to do it entirely by myself. In other words, there's an opportunity cost calculation involved, not a simple calculation of fees paid.

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SimpleGift
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by SimpleGift » Wed Jul 31, 2013 12:31 pm

Hub wrote:
dbr wrote:People should not forget to increase investment fees by adding to the ER an estimate of inside the fund trading costs that are not in the ER. That could be as low as a few hundredths of a percent for low turnover index funds up to an additional 1% or more for high turnover active funds. Turnover in bond index funds may be less expensive than turnover in stock funds?
I don't understand this well. How do you estimate it?
The only quantitative study I've seen is this one, which measured trading costs due to turnover in active equity mutual funds. This chart summarizes the study's findings (the turnover percent is the red bars):

Image
Source: Wall Street Journal

Since many index funds have turnover in the 5%-10% range, their trading costs hardly appear on this chart.
Last edited by SimpleGift on Wed Jul 31, 2013 4:17 pm, edited 1 time in total.
Cordially, Todd

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by allsop » Wed Jul 31, 2013 12:44 pm

The poll have many implied assumptions, not the least that not all bogleheads are US based investors nor that several (many?) US based bogleheads have taxable accounts.

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SimpleGift
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by SimpleGift » Wed Jul 31, 2013 12:54 pm

allsop wrote:The poll have many implied assumptions, not the least that not all bogleheads are US based investors nor that several (many?) US based bogleheads have taxable accounts.
Not so, allsop. The table is just based on a mathematical formula from Vanguard, found here, which calculates the reduction in one's final wealth by investment fees and time horizon. There's no taxes involved or U.S.-centric issues.

Folks can make the poll question as simple or as complicated as they wish. It's not a test with a "right" answer — it's just a tool to help guide rational investment decisions.
Last edited by SimpleGift on Wed Jul 31, 2013 1:05 pm, edited 1 time in total.
Cordially, Todd

Silence Dogood
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by Silence Dogood » Wed Jul 31, 2013 12:56 pm

Well, here's hoping that Vanguard lowers the expense ratios for the Target Retirement Funds, because I still have 40+ years to go (hopefully)...

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G-Money
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by G-Money » Wed Jul 31, 2013 1:10 pm

Don't know.

What's my ER going to be 10, 20, 30 or more years from now?
Don't assume I know what I'm talking about.

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by G-Money » Wed Jul 31, 2013 1:20 pm

Simplegift wrote:Folks can make the poll question as simple or as complicated as they wish. It's not a test with a "right" answer — it's just a tool to help guide rational investment decisions.
Isn't the general idea here to find whatever funds fit your desired AA at the lowest cost (ER, tax, and otherwise)?

I also don't really like the premise of the thread title. It seems to presume that you can reach whatever your end wealth will be without incurring investment fees. I suppose it is possible to get your bond ER to 0.00% (buy Treasuries at auction and hold to maturity). But to invest in stocks, to my knowledge, must cost SOMETHING. You could buy VTI/VTSAX (0.05%). Maybe you have access to institutional funds or collective trusts with even lower expenses. Or maybe you find a brokerage that allows you to buy stocks for 0 commission (but there will still be spreads). But it always costs something. So while investment fees are a cost that technically reduce your end wealth, at some level, they are necessary to earn a return higher than whatever CDs and savings accounts are paying.

Or maybe my curmudgeon level is just set to "high" today and I'm reading too much into things.
Don't assume I know what I'm talking about.

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by chaz » Wed Jul 31, 2013 2:07 pm

Doing good so far - low ERs and in good health.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

manwithnoname
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by manwithnoname » Wed Jul 31, 2013 3:33 pm

So if you have a diversified portfolio of stock and bonds your ER will be 0. Only cost will be commissions.

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by letsgobobby » Wed Jul 31, 2013 3:46 pm

good thread, though preaching to the choir here. Most Bogleheads will have low numbers.

It would be great to post this at more general finance boards.

I'm 0.10% x 30 years, so a pretty low figure for me.

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by G-Money » Wed Jul 31, 2013 3:51 pm

manwithnoname wrote:So if you have a diversified portfolio of stock and bonds your ER will be 0. Only cost will be commissions.
Yes, but the commissions are "investment fees." The spreads on purchases and sales is another cost that, while technically not "investment fees," still produce a drag on returns. And you will presumably incur these costs both through the accumulation phase (as you keep adding to your accounts) and decumulation phase (as you liquidate). Short of investing solely in savings accounts, CDs, Treasury bonds (bought at auction and held to maturity), and savings bonds, I don't think it's possible to invest for free. And restricting yourself to only those options will very likely provide an even greater drag on your end wealth than the ERs of a portfolio of Vanguard funds.
Don't assume I know what I'm talking about.

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JoMoney
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by JoMoney » Wed Jul 31, 2013 4:15 pm

Hub wrote:
dbr wrote:People should not forget to increase investment fees by adding to the ER an estimate of inside the fund trading costs that are not in the ER. That could be as low as a few hundredths of a percent for low turnover index funds up to an additional 1% or more for high turnover active funds. Turnover in bond index funds may be less expensive than turnover in stock funds?
I don't understand this well. How do you estimate it?
The exact amount of each funds trading costs is usually found in the "Statement of Additional Information".

Another "frictional" expenses that doesn't necessarily add up to much annually, but is very difficult to account for, and over time could make a difference is the bid-ask spread on the stock being sold. The bid-ask spread pays the market-makers who help the liquidity in the market... this expense is real, but it can only be quantified at the exact time of the sell/purchase order. Very low volume stocks often have a very high spread.

Also, the foreign taxes on dividends from international stocks add an expense, not necessarily an "investment fee", but it is a cost.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by neurosphere » Wed Jul 31, 2013 4:20 pm

I think this is a great table which I am going to include with some of the materials I give to medical residents and fellows each year. For someone just "starting out", it might be helpful to include a list of all the kinds of fees and the ranges which can add up to the "total" fee which eats at returns. I wonder if something like this is on the wiki?

I thinking of a list which looks something like this (numbers are just off the top of my head, for illustration only):

Percentage based fees which apply at all times:
Mutual fund expense ratios: 0.05% to 3% (or higher). Average is 1.5%.
Asset under management fees: 0.3% to 1.5% (generally 1%, but lower with higher balances).
Wrap fees or accounting/processing fees, for example in 401k or 403b plans: 0.1% to 0.5%.

One time, transaction based fees:
Purchase or sales loads on mutual funds: 1% to 5.75%.
Broker assisted trades: 1% to 3% for each transaction.

Dollar based fees:
Account service charges: varies, from $5 to $100 per year per account for some account types.
Administrative fees: varies.
Account closure and transfer fees: $25 to $300
Hourly planning/consulting fees: $100-$500


Anyway, just an example. I think I've seen a similar list somewhere intended for people to give to their 401k plan administrators and ask "do you charge this fee? What about this one? How 'bout this one here?..."

The vanguard table is wonderful for educating everyone on the impact of fees, but would be even better when accompanied by the information above so that people understand that fees aren't limited to simply annual percentage charges of total assets (i.e. not only expense ratios and assets under management).

NS
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by manwithnoname » Wed Jul 31, 2013 4:25 pm

G-Money wrote:
manwithnoname wrote:So if you have a diversified portfolio of stock and bonds your ER will be 0. Only cost will be commissions.
Yes, but the commissions are "investment fees." The spreads on purchases and sales is another cost that, while technically not "investment fees," still produce a drag on returns. And you will presumably incur these costs both through the accumulation phase (as you keep adding to your accounts) and decumulation phase (as you liquidate). Short of investing solely in savings accounts, CDs, Treasury bonds (bought at auction and held to maturity), and savings bonds, I don't think it's possible to invest for free. And restricting yourself to only those options will very likely provide an even greater drag on your end wealth than the ERs of a portfolio of Vanguard funds.
How much will the % cost be if the stocks are held for 20 years with two trades a year and dividends and interest are not reinvested?

Bid ask/spread in highly liquid stocks traded on national exchanges is inconsequential -maybe .002% a share .

http://www.morningstar.com/InvGlossary/ ... pread.aspx

Bonds are held to maturity. New purchases are at par.

No need to sell. Fund will be transferred to heirs with stepped up basis because income is sufficient.

I project less than 0.2% total cost over investment period which close enough to 0.

[Comment removed by admin LadyGeek]

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by manwithnoname » Wed Jul 31, 2013 4:42 pm

neurosphere wrote:Anyway, just an example. I think I've seen a similar list somewhere intended for people to give to their 401k plan administrators and ask "do you charge this fee? What about this one? How 'bout this one here?..."

NS
401k/403b plan administrators will tell the participants to consult the fee disclosure information that was provided to them under the DOL regulations that took effect over a year ago.

http://www.shrm.org/hrdisciplines/benef ... oHide.aspx

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by G-Money » Wed Jul 31, 2013 4:47 pm

manwithnoname wrote:Bid ask/spread in highly liquid stocks traded on national exchanges is inconsequential -maybe .002% a share .
That may be the case for the largest large cap stocks, although I imagine that's a bit optimistic even for them. I doubt the majority of the stocks in just the S&P 500 have that narrow a spread. But, as noted in the article, the spreads for smaller cap stocks are significantly higher. And how are you proposing to invest in international stocks at no or inconsequential cost (assuming you don't think the 0.16% ER of Total International is inconsequential)?

And good luck getting that kind of deal in a 401(k).
manwithnoname wrote:Bonds are held to maturity. New purchases are at par.
Right. That's doable, as noted in my post above.
manwithnoname wrote:No need to sell. Fund will be transferred to heirs with stepped up basis because income is sufficient.
That's a very fortuitous situation. Certainly not common, even among Bogleheads. At some point, of course, somebody is going to need to sell and incur some costs.
manwithnoname wrote:[Comment removed by admin LadyGeek]
[Response to comment removed by admin LadyGeek]
Don't assume I know what I'm talking about.

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by JamesSFO » Wed Jul 31, 2013 5:23 pm

G-Money wrote:...
I also don't really like the premise of the thread title. It seems to presume that you can reach whatever your end wealth will be without incurring investment fees. I suppose it is possible to get your bond ER to 0.00% (buy Treasuries at auction and hold to maturity). But to invest in stocks, to my knowledge, must cost SOMETHING. You could buy VTI/VTSAX (0.05%).....
Or maybe my curmudgeon level is just set to "high" today and I'm reading too much into things.
I actually really like the chart, and I don't think the presumption is that you can reach 0. I think the point is it is easy to say 0.10% vs. 0.25% isn't a big deal. But over 30 years that's actually -3% vs. -7.2% hit to my wealth and maybe I should think hard about whether that 0.25% fund is giving me commensurate additional return.

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by manwithnoname » Wed Jul 31, 2013 5:59 pm

G-Money wrote:
manwithnoname wrote:Bid ask/spread in highly liquid stocks traded on national exchanges is inconsequential -maybe .002% a share .
That may be the case for the largest large cap stocks, although I imagine that's a bit optimistic even for them. I doubt the majority of the stocks in just the S&P 500 have that narrow a spread. But, as noted in the article, the spreads for smaller cap stocks are significantly higher. And how are you proposing to invest in international stocks at no or inconsequential cost (assuming you don't think the 0.16% ER of Total International is inconsequential)?

And good luck getting that kind of deal in a 401(k).
manwithnoname wrote:Bonds are held to maturity. New purchases are at par.
Right. That's doable, as noted in my post above.
manwithnoname wrote:No need to sell. Fund will be transferred to heirs with stepped up basis because income is sufficient.
That's a very fortuitous situation. Certainly not common, even among Bogleheads. At some point, of course, somebody is going to need to sell and incur some costs.

[Response to comment removed by admin LadyGeek]
Well, so what if spreads are 10X more, .002% instead of .00002. It doesn't move the needle. No investment in international stocks.

who cares about selling at some unknown date in the future. Its a meaningless .000%

Not a 401k.

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by MathWizard » Wed Jul 31, 2013 6:11 pm

Oops, voted 12-18% due to current fees in employer retirement account, an assuming a 40 years
timeframe. (Optimistic , I know.)

I should have factored in that I plan to move assets to Vanguard and drop my ER from over 0.42% to
0.07 or 0.05%

That would drop me nto the 2-4% range.

I didn't see a way to change my vote.

Maybe I should have voted too confusing.

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by SimpleGift » Wed Jul 31, 2013 6:17 pm

Viewing the results of this poll so far, the first thought that crossed my mind was how very much most of us are truly indebted to John C. Bogle for making low-cost index investing a practical reality. I had never thought of this debt in cumulative dollars and cents before, but the table above makes this possible. Without his vision, dedication and caring for others, it's easy to see how much of our ending wealth would otherwise be in the hands of paid investment professionals, instead of in our own personal investment accounts.

My second thought was that perhaps I might owe something back for this gift given. Not to Mr. Bogle per se, but rather in the spirit of "paying it forward." Knowing that about 20% of my ending wealth is going to be a complete boon to me (the difference between 1.00% and 0.25% fees over 40 years), it does tend to inspire a more generous turn of heart — which I might now be more inclined to act upon when opportunities present themselves. Just a thought.
Last edited by SimpleGift on Wed Jul 31, 2013 6:19 pm, edited 1 time in total.
Cordially, Todd

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Blue
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by Blue » Wed Jul 31, 2013 6:19 pm

Interesting chart.

Of course, the inverse is also true, if "x, y, or z" activity can enhance portfolio returns by fractional percentage then similar impact on terminal portfolio value.

x, y, or z = any of the commonly debated portfolio enhancers such as tilting, reaching for newly described premia, hiring an advisor, rebalancing "bonuses", tactical asset allocation, etc

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by G-Money » Wed Jul 31, 2013 6:29 pm

manwithnoname wrote:Well, so what if spreads are 10X more, .002% instead of .00002. It doesn't move the needle. No investment in international stocks.

who cares about selling at some unknown date in the future. Its a meaningless .000%

Not a 401k.
As I said, a very fortuitous situation. I'm sure you realize your situation is extremely unique, even among Bogleheads. But great for you.

Not sure why you'd forego >50% of the global economy by passing on international stocks (more like >65% by sticking only to large cap domestic), but that's your choice.

Congrats on winning the lowest investment cost prize. :wink:
Don't assume I know what I'm talking about.

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by G-Money » Wed Jul 31, 2013 6:34 pm

JamesSFO wrote:I actually really like the chart, and I don't think the presumption is that you can reach 0. I think the point is it is easy to say 0.10% vs. 0.25% isn't a big deal. But over 30 years that's actually -3% vs. -7.2% hit to my wealth and maybe I should think hard about whether that 0.25% fund is giving me commensurate additional return.
I think the chart is fine. As I explained, I just didn't like the premise of the thread title.

I also think that the performance of the asset classes will matter a whole lot more than the difference between 0.10 and 0.25, so it would be silly to forego an asset class with a higher expected return to save a few basis points in ER. But I say this as someone who recently dipped his toe into VFSVX. :)
Don't assume I know what I'm talking about.

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by manwithnoname » Wed Jul 31, 2013 6:45 pm

Because Large cap US stocks derive > 50%-60% of their income outside US and I don't have to worry about currency risk. Europe, China, Brazil are having economic problems. gold -FORGETABOUTIT.

Do you believe that the EURO is stronger currency than the $? or the Yuan?

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by JoMoney » Wed Jul 31, 2013 7:25 pm

manwithnoname wrote:Because Large cap US stocks derive > 50%-60% of their income outside US and I don't have to worry about currency risk. Europe, China, Brazil are having economic problems. gold -FORGETABOUTIT.

Do you believe that the EURO is stronger currency than the $? or the Yuan?
Even U.S. domiciled large global companies do have to worry about currency risk... so there is still some risk, it's just that the companies are in a better position to manage it because they have lots of other business and transactions going on in those foreign countries (opposed to an individual in the U.S. buying a smaller foreign company that does business strictly in that one country). So.. essentially I'm agreeing with you.

In the long run, currency vs currency winds up being a zero-sum game. Over time it starts to balance out at a par value for what amount of goods and services you can exchange it for... When one item starts selling for more or less in a different region eventually people start trying to profit or arbitrage the difference until the difference is gone.
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by G-Money » Wed Jul 31, 2013 7:29 pm

manwithnoname wrote:Because Large cap US stocks derive > 50%-60% of their income outside US and I don't have to worry about currency risk. Europe, China, Brazil are having economic problems. gold -FORGETABOUTIT.

Do you believe that the EURO is stronger currency than the $? or the Yuan?
The risks are priced in.

The merits of international investing have been discussed ad nauseum in other threads (including recently). If you want to discuss further, you should probably start a new thread.
Don't assume I know what I'm talking about.

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by EyeYield » Wed Jul 31, 2013 7:37 pm

I once did a rough estimate on how much not paying commissions increased my end wealth and it came out to about $200k, but that wasn't the question, so I didn't vote.
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by grabiner » Wed Jul 31, 2013 8:48 pm

My expenses are about 0.2%, so my total loss to expenses isn't that great even though I am a long way from retirement.

I'll lose more to taxes. My portfolio is more than half taxable, and I lose 0.4% to taxes (federal and state) on a 2% yield every year even if it is all qualified dividends, plus 20% tax on capital gains.
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by SGM » Wed Jul 31, 2013 9:12 pm

I find the table helpful. There is no question that even smaller fees take a bite out of one's portfolio over the long term. I do believe with a large enough low turnover portfolio, some expense can be saved by buying stocks and bonds directly. Even with a large portfolio I think it is difficult to get sufficient diversity without allocating some funds to small cap, reit and emerging market funds or to the total stock market or total international index funds.
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by AndrewJackson » Wed Jul 31, 2013 10:54 pm

Wow, God bless vanguard. This is why I love this company so much. I think my portfolio expense ratio is around .13% for a worldwide diversified portfolio.

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by JamesSFO » Wed Jul 31, 2013 11:12 pm

G-Money wrote: I also think that the performance of the asset classes will matter a whole lot more than the difference between 0.10 and 0.25, so it would be silly to forego an asset class with a higher expected return to save a few basis points in ER. But I say this as someone who recently dipped his toe into VFSVX. :)
Agreed, but assume you have two ways to get an asset class, e.g. REITS, which one should you pick...

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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by SimpleGift » Thu Aug 01, 2013 12:02 am

If interested, this is the formula to calculate any cumulative impact on your own (from Vanguard):
  • Cumulative Impact, in percent = 1 - ((1 + c) ^ (-T)),
    where "c" is the relevant factor, in percent per year, and "T" is time horizon, in years.
One easy way to do this calculation is with the POWER function in Excel or another spreadsheet program. Once you get the hang of it, the formula can be useful to determine the cumulative effect of any factor upon your portfolio over a given time horizon (say, a tax cost), or even a positive cumulative effect (such as an expected value premium).
Cordially, Todd

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meowcat
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by meowcat » Thu Aug 01, 2013 6:09 am

manwithnoname wrote: 401k/403b plan administrators will tell the participants to consult the fee disclosure information that was provided to them under the DOL regulations that took effect over a year ago.

http://www.shrm.org/hrdisciplines/benef ... oHide.aspx
You still believe in this DOL "Full Disclosure" thing with full faith, don't you. You seem to bring it up every chance you get. I wouldn't have too much faith in it because the regulation, in reality, still favors Wall Street. There are still fees you'll be paying in your 401(k) that will never, ever, have to be disclosed. In many plans, those fees can be as high as 2% - 3%, and that's on top of the "disclosed" 2%!!
More people should learn to tell their dollars where to go instead of asking them where they went. | -Roger Babson

manwithnoname
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by manwithnoname » Thu Aug 01, 2013 10:02 am

meowcat wrote:
manwithnoname wrote: 401k/403b plan administrators will tell the participants to consult the fee disclosure information that was provided to them under the DOL regulations that took effect over a year ago.

http://www.shrm.org/hrdisciplines/benef ... oHide.aspx
You still believe in this DOL "Full Disclosure" thing with full faith, don't you. You seem to bring it up every chance you get. I wouldn't have too much faith in it because the regulation, in reality, still favors Wall Street. There are still fees you'll be paying in your 401(k) that will never, ever, have to be disclosed. In many plans, those fees can be as high as 2% - 3%, and that's on top of the "disclosed" 2%!!
I refer to the Dol reg because that's as is as good as it gets in disclosure of 401k fees. Including fee disclosure information increases plan costs because of all the legal, admin, compliance work needed to pull the information together. Yes there are costs that are not disclosed such as custodial fees and mortality charges but those are not investment related fees. If you think some fees are not being disclosed write to Phyllis Borzi at the Employee Benefit Security Administration.

As it is few employees read the fee disclosure information because it is too complex to understand andit is difficult to determine how much of the 401k account is reduced by fees. Don't shoot me I didn't write the regulations.

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House Blend
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by House Blend » Thu Aug 01, 2013 10:46 am

The Cumulative Impact may be sexy, but it is an exaggeration.

That's because money is contributed steadily over decades, so the impact on later contributions is less. Or in decumulation mode, money spent is no longer subject to fees.

Example: contribute $10,000 on Jan 1 every year for 30 years.
The account earns 8% every year, but 2% in fees are charged.
(So a net of 1.08/1.02 = about 5.88%/year--see addendum below.)

Balance after 30 years: $819,954.
Balance without fees: $1,223,459.

"True" Cumulative Impact: -33.0%.
Cumulative Impact according to the VG chart: -44.8%.

Edited to add: BTW, you can make a case that Vanguard's table is off.

A cost of 2% for 30 years is 1-(0.98)^30 = 45.4%, whereas a cost of 1-1/1.02 is really 1.96% per year, and 1 - (1/1.02)^30 = 44.8% for 30 years which is the number in VG's table.

But I did my calculation in the same erroneous way so that the comparison is fair.

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SimpleGift
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by SimpleGift » Thu Aug 01, 2013 11:12 am

House Blend wrote:Example: contribute $10,000 on Jan 1 every year for 30 years. The account earns 8% every year, but 2% in fees are charged. (So a net of 1.08/1.02 = about 5.88%/year.)
House Blend, I'm admittedly a math dunce, but I believe you've got this wrong. The fees may be deducted from returns each year (as per your example), but they are charged against the amount of one's assets. Thus, as assets grow, the total amount of fees grows in proportion — which would confirm Vanguard's cumulative impact numbers. Portfolio returns are irrelevant to the cumulative impact calculation.

Vanguard discusses this dynamic in the original article where I found the table, here.
Last edited by SimpleGift on Thu Aug 01, 2013 12:31 pm, edited 1 time in total.
Cordially, Todd

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House Blend
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by House Blend » Thu Aug 01, 2013 11:32 am

Simplegift wrote:
House Blend wrote:Example: contribute $10,000 on Jan 1 every year for 30 years. The account earns 8% every year, but 2% in fees are charged. (So a net of 1.08/1.02 = about 5.88%/year.)
House Blend, I'm an admitted math dunce, but I believe you've got this wrong. The fees may be deducted from returns each year (as per your example), but they are charged against the amount of one's assets.
No, my calculation was correct on this point. It shaves off a factor of 1.02 from the account balance at the end of each year, not just from the returns.

As noted in the edit to my post, you can make a case that this is really a fee of 1.96%, but the Vanguard table is based on that same 1.02 shaving factor.

The reality is that if you are making regular contributions, then portfolio returns do alter the true "cumulative impact" of fees.

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SimpleGift
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by SimpleGift » Thu Aug 01, 2013 12:33 pm

Thanks, House Blend. I had missed the edit to your first post.
Cordially, Todd

manwithnoname
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by manwithnoname » Thu Aug 01, 2013 3:51 pm

After reading HB"s analysis I don't know what the correct methodology is to calculate the cumulative amount of fees. It appears from what I understand that the VG analysis assumes a linear progression of fees which leads to increasingly larger annual fees being paid over time. If this assumption is correct, in the case of equity funds over the last 13 years this result would be highly unusual given the gyrations in the financial markets where the S & P declined by 50% from 2000-3 and 40% from 2007-09 where the equity markets only recently have exceeded the Oct 2007 values. Instead of increasing, fund fees collected declined precipitously with the decline in equity balances. Also the period when the high fees were collected can drastically affect how much is actually paid in fees. For example, if an investor has a balance in a fund that grows slowly over the first 25 years but dramatically has dramatic gains in the last 5 years the amount of fees paid on the larger balance will be relatively small because of the shorter duration of the large balance. I cant tell from the materials whether this variation is taken into account in the formula. Perhaps some one can explain whether such variations in account balances are taken into account in the formula. There may be other situations where the actual fees paid by an investor will vary greatly from the projected % in the article.

What I find most perplexing is this statement in the article:

"If there are positive returns, that just means the provider’s charges are rising faster over time. With a 1% fee for 30 years, the provider is still getting on the order of 30% of what would otherwise be yours.

If I start out with an investment of $10,000 and at then end of 30 years it is worth 100,000 does this mean that the provider collected $30,000?

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House Blend
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by House Blend » Thu Aug 01, 2013 4:33 pm

manwithnoname wrote:If I start out with an investment of $10,000 and at then end of 30 years it is worth 100,000 does this mean that the provider collected $30,000?
No, but if the provider secretly stashed the fees into an account that was identically invested and had fees of 0%, then they would have (very roughly) $30K at the end of 30 years.

manwithnoname
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by manwithnoname » Thu Aug 01, 2013 4:52 pm

House Blend wrote:
manwithnoname wrote:If I start out with an investment of $10,000 and at then end of 30 years it is worth 100,000 does this mean that the provider collected $30,000?
No, but if the provider secretly stashed the fees into an account that was identically invested and had fees of 0%, then they would have (very roughly) $30K at the end of 30 years.
That is exactly the conclusion that I came to while doing a manual calculation of 10k invested for 10 years @ 8% with a 1% fee. The cumulative fees charged over 10 years were 4.9% of the account balance at the end of 10 years so I assumed that had the fees been invested by the provider @8% the fees would have equaled the % in the article. Under the rule of 72 the fees would have doubled in 9 years @8%. So the 30% represents the amount that the provider would have received if it had elected to invest each year fees collected in a a fund earning 8% before expenses.

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meowcat
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Re: [Poll] How Much Will Investment Fees Reduce Your End Wea

Post by meowcat » Fri Aug 02, 2013 6:50 am

neurosphere wrote:
Anyway, just an example. I think I've seen a similar list somewhere intended for people to give to their 401k plan administrators and ask "do you charge this fee? What about this one? How 'bout this one here?..."
neurosphere, near as I can tell by reading many of the wonderful books listed in the wiki, (4 pillars, for example) these fees are so deceptive and run so deep that your plan administrator doesn't know anything about them. Your administrators boss doesn't know about them, and his boss doesn't know about them. In fact, it's so problematic that even upper management at the 401(k) provider themselves don't know much about them. This leaves the investor standing in the dark while he gets robbed blind and is unable to find answers anywhere. Meanwhile, Wall Street continues to get richer on your dollar and the SEC and the DOL refuse to step in and do anything about it.
For the record, not all 401(k) providers are like this.
More people should learn to tell their dollars where to go instead of asking them where they went. | -Roger Babson

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