Cost difference

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stemikger
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Cost difference

Post by stemikger » Tue Jun 16, 2015 8:52 am

If the Vanguard Balanced Index Fund cost $9 per $10K for admiral shares.

How much would it be if I chose the Vanguard Total Stock Index and Total Bond Index also choosing 60/40 (Admiral Shares).

I'm not sure how to figure it out.

Thanks
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livesoft
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Re: Cost difference

Post by livesoft » Tue Jun 16, 2015 8:57 am

Weighted average of the expense ratios:

[ (60 * 0.05) + (40 * .07) ] / (60 + 40) =

I hope you can see that the result of the above equation will be more than 0.05 and less than 0.07.

Then apply that weighted expense ratio to a $10,000 investment.
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BL
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Re: Cost difference

Post by BL » Tue Jun 16, 2015 9:13 am

deleted
Last edited by BL on Tue Jun 16, 2015 9:16 am, edited 1 time in total.

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stemikger
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Re: Cost difference

Post by stemikger » Tue Jun 16, 2015 9:14 am

livesoft wrote:Weighted average of the expense ratios:

[ (60 * 0.05) + (40 * .07) ] / (60 + 40) =

I hope you can see that the result of the above equation will be more than 0.05 and less than 0.07.

Then apply that weighted expense ratio to a $10,000 investment.


Thanks, it looks like it will be $60 vs. $90 per $100,000. It's a small difference, but it can add up when you are talking about large amounts.
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livesoft
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Re: Cost difference

Post by livesoft » Tue Jun 16, 2015 9:18 am

It may look like it will be $60, but it isn't.
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stemikger
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Re: Cost difference

Post by stemikger » Tue Jun 16, 2015 9:38 am

livesoft wrote:It may look like it will be $60, but it isn't.


How's that? Embarrassed to admit this, but I'm dyslexic especially with numbers. Can you tell me what I did wrong?
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livesoft
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Re: Cost difference

Post by livesoft » Tue Jun 16, 2015 9:45 am

I suspect you didn't use a calculator, but other than that it is hard to tell you how you did because only you know.

Here is a "common sense" explanation that it cannot be $60 because an expense ratio of 0.06 would be halfway between 0.05 and 0.07. Since the allocation is 60/40 and NOT 50/50, the expense ratio cannot be halfway between 0.05 and 0.07.

And to continue, is the weighted average expense ratio more towards the 0.05 or more towards the 0.07? That is, is the answer less than 0.06 or more than 0.06? Here is the same question another way: Is 60% bigger than 40%?
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Re: Cost difference

Post by nirm » Tue Jun 16, 2015 10:37 am

Yes, as livesoft mentioned above, you would use weighted average and not just average.

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Re: Cost difference

Post by Elbowman » Tue Jun 16, 2015 10:41 am

livesoft wrote:Is 60% bigger than 40%?
IMO, it's close enough to $60 that your responses are unnecessarily harsh.

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DaftInvestor
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Re: Cost difference

Post by DaftInvestor » Tue Jun 16, 2015 10:43 am

So your concern is about what it will cost you for a 0.09 ER investment versus one that lands somewhere between 0.05 and 0.07?

On 100K you are talking somewhere on the order of $30 per year - kind of splitting hairs here aren't we? Might be easier to skip lunch today and call it even :)

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Re: Cost difference

Post by livesoft » Tue Jun 16, 2015 10:50 am

Elbowman wrote:
livesoft wrote:Is 60% bigger than 40%?
IMO, it's close enough to $60 that your responses are unnecessarily harsh.

I would love to see a poll on that. :)
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tyrion
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Re: Cost difference

Post by tyrion » Tue Jun 16, 2015 11:05 am

livesoft wrote:
Elbowman wrote:
livesoft wrote:Is 60% bigger than 40%?
IMO, it's close enough to $60 that your responses are unnecessarily harsh.

I would love to see a poll on that. :)



There is an exact answer, and a 'ballpark' answer.

If you're trying to estimate how much paint you need to cover a wall, for example, you might not care if it's 9'10" by 10'1". You call it 10 x 10.

In this case it's easy enough to get the real answer. But I suppose you could ballpark it if you just wanted to get close.

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bertie wooster
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Re: Cost difference

Post by bertie wooster » Tue Jun 16, 2015 11:12 am

Elbowman wrote:
livesoft wrote:Is 60% bigger than 40%?
IMO, it's close enough to $60 that your responses are unnecessarily harsh.


livesoft's style is to be unnecessarily harsh. It's part of his charm I suppose (though inappropriate IMO).

To the OP - the difference is negligible, even for large sums of money. If you appreciate simplicity in your investments go with the balanced funds. If you like to rebalance yourself go with the separate funds. But don't go with the separate funds in hopes of saving lots of money, because the money you save will be minimal.

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Re: Cost difference

Post by TomatoTomahto » Tue Jun 16, 2015 11:14 am

Elbowman wrote:
livesoft wrote:Is 60% bigger than 40%?
IMO, it's close enough to $60 that your responses are unnecessarily harsh.


Elbowman, stemikger has been around here long enough to know that livesoft sometimes has quirky ways of answering, but that he's very often a very helpful person. Sometimes a spoonful of sugar helps.

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TomatoTomahto
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Re: Cost difference

Post by TomatoTomahto » Tue Jun 16, 2015 11:20 am

Stemikger, in $10k of the 60/40 fund, you have
$6000 at a rate of 0.0005 (or, 0.05%) = 3
and
$4000 at a rate of 0.0007 (or, 0.07%) = 2.8

for a total charge of 5.8 per $10k. Expressed as an ER, that's 0.058%

ETA: for each $10k, you would pay $5.80 rather than $9.00. Whether that's material or not is your call.

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Re: Cost difference

Post by niceguy7376 » Tue Jun 16, 2015 11:23 am

stemikger wrote:If the Vanguard Balanced Index Fund cost $9 per $10K for admiral shares. How much would it be if I chose the Vanguard Total Stock Index and Total Bond Index also choosing 60/40 (Admiral Shares). I'm not sure how to figure it out.

Thanks


$58 Vs $90 for 100K investment - Exact answer.

My question to OP is if this is going to be in taxable account or non taxable account to consider the tax angle as well.

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Re: Cost difference

Post by #Cruncher » Tue Jun 16, 2015 12:04 pm

livesoft in this post wrote:
Elbowman wrote:...IMO, it's close enough to $60 that your responses are unnecessarily harsh.
I would love to see a poll on that. :)
My vote: Not harsh at all. The point is that stemikger's answer (in this post) indicates he may not understand the procedure, not that he didn't get the exact answer. If I say 9' 10" by 10' 1" is 100 square feet (to use tyrion's example), it would indeed be petty to criticize me for not getting the exact answer. It's apparent I'm just simplifying the multiplication. But if I say that 2 + 2 is 3.99, it would be appropriate to criticize me. It's apparent I don't understand addition.

I would only chide livesoft for making his procedure unduly general. When the weights are percents that add up to 100%, it's not necessary to compute:

Code: Select all

weighted average = [ (60 * 0.05) + (40 * .07) ] / (60 + 40)
It's enough to compute:

Code: Select all

weighted average = (0.6 * 0.05) + (0.4 * 0.07)
Last edited by #Cruncher on Tue Jun 16, 2015 12:12 pm, edited 1 time in total.

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Re: Cost difference

Post by tyler_cracker » Tue Jun 16, 2015 12:11 pm

livesoft,

i just wanted to say that i love you and to encourage you to ignore the haters and their helicopter parenting.

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Re: Cost difference

Post by livesoft » Tue Jun 16, 2015 12:17 pm

#Cruncher wrote:I would only chide livesoft for making his procedure unduly general.

I had it less general, but then I thought someone would come along and ask a question like:

"I have 30% in TSM, 20% in TISM, and 10% in REITs for my equities. What is my average weighted expense ratio for just my equity assets?"

@tyler_cracker, thanks, but I wonder if others think that I need no encouragement. 8-)
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stemikger
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Re: Cost difference

Post by stemikger » Tue Jun 16, 2015 4:03 pm

Thanks everyone. Livesoft, no offense was taken and I appreciate your help. I'm a close enough kind of guy, so $60 was fine with me.

Thanks to the others. This is all in a 401K, so a balanced fund will fit the bill. The amount of money saved will not be a deal breaker.

Thanks again!!
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DSInvestor
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Re: Cost difference

Post by DSInvestor » Tue Jun 16, 2015 4:22 pm

stemikger wrote:Thanks everyone. Livesoft, no offense was taken and I appreciate your help. I'm a close enough kind of guy, so $60 was fine with me.

Thanks to the others. This is all in a 401K, so a balanced fund will fit the bill. The amount of money saved will not be a deal breaker.

Thanks again!!


Balanced Index Admiral shares has a very low expense ratio and the advantage of automatically maintaining 60/40 AA for you. The overall expense ratio for TSM and TBM Admiral would be a little lower but you'd have to rebalance yourself. If you're investing in several accounts, 401k, His IRA, Her IRA, Balanced Index can be used in all all accounts with little or no work. You can be confident that any contributions made to any account will always be applied in a manner that maintains your 60/40 AA. If TSM/TBM is used, then there are questions about fund placement which may make it more difficult for some folks to rebalance. However, if one is investing in taxable accounts as well as tax advantaged accounts, my preference would be to use separate funds rather than balanced funds to allow for tax efficient fund placement.

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stemikger
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Re: Cost difference

Post by stemikger » Tue Jun 16, 2015 5:44 pm

DSInvestor wrote:
stemikger wrote:Thanks everyone. Livesoft, no offense was taken and I appreciate your help. I'm a close enough kind of guy, so $60 was fine with me.

Thanks to the others. This is all in a 401K, so a balanced fund will fit the bill. The amount of money saved will not be a deal breaker.

Thanks again!!


Balanced Index Admiral shares has a very low expense ratio and the advantage of automatically maintaining 60/40 AA for you. The overall expense ratio for TSM and TBM Admiral would be a little lower but you'd have to rebalance yourself. If you're investing in several accounts, 401k, His IRA, Her IRA, Balanced Index can be used in all all accounts with little or no work. You can be confident that any contributions made to any account will always be applied in a manner that maintains your 60/40 AA. If TSM/TBM is used, then there are questions about fund placement which may make it more difficult for some folks to rebalance. However, if one is investing in taxable accounts as well as tax advantaged accounts, my preference would be to use separate funds rather than balanced funds to allow for tax efficient fund placement.


+1
Thanks! :beer
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JoMoney
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Re: Cost difference

Post by JoMoney » Wed Jun 17, 2015 2:29 am

#Cruncher wrote:...if I say that 2 + 2 is 3.99, it would be appropriate to criticize me...

Maybe we could come up with some defense for it https://en.wikipedia.org/wiki/0.999...
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Re: Cost difference

Post by red5 » Wed Jun 17, 2015 4:22 am

stemikger wrote:Thanks, it looks like it will be $60 vs. $90 per $100,000. It's a small difference, but it can add up when you are talking about large amounts.


An ER of .058% versus .09% indeed is smaller but it perhaps is close enough that other factors will overcome it. Perhaps your rebalancing plan will have a positive (or negative) effect on your return relative to the Balanced Index Fund. My point is that with all else being equal an ER difference of 0.032% will save you money but rarely is all else equal.

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Re: Cost difference

Post by IlikeJackB » Wed Jun 17, 2015 9:48 am

Livesoft was trying to teach stemikger to fish. That's how livesoft works, and for that I applaud him. :beer

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Re: Cost difference

Post by Jack FFR1846 » Wed Jun 17, 2015 10:36 am

Excel is your friend. Although I have tons of math background, there's nothing easier than setting the formulas up and pasting them into a column. Changed ER? Make the appropriate cell change and watch the fund cost and total cost update.
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sharpjm
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Re: Cost difference

Post by sharpjm » Wed Jun 17, 2015 11:07 am

IlikeJackB wrote:Livesoft was trying to teach stemikger to fish. That's how livesoft works, and for that I applaud him. :beer

Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.

This reminds me of another famous quote:

If you have one bucket that contains 2 gallons and another bucket that contains 7 gallons, how many buckets do you have?

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IlikeJackB
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Re: Cost difference

Post by IlikeJackB » Wed Jun 17, 2015 11:47 am

sharpjm wrote:This reminds me of another famous quote:

If you have one bucket that contains 2 gallons and another bucket that contains 7 gallons, how many buckets do you have?


Never heard that one. I'll bite ….. Answer: 2 buckets.
"Do what you will, the capital is at hazard." Justice Samuel Putnam, Harvard College vs Amory, 1830. The "Prudent Man Rule."

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