Mutual Fund "share price"

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ResearchMed
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Mutual Fund "share price"

Post by ResearchMed » Sun Oct 22, 2017 9:20 am

Two times recently, someone has commented that the mutual fund share price seems to be a factor in purchasing consideration:

viewtopic.php?f=1&t=230094&newpost=3583 ... ead#unread
and
viewtopic.php?f=1&t=230386&newpost=3583 ... ead#unread

It occasionally comes up slightly differently, when someone is confused by different pricing of Investor vs. Admiral class shares, as though one is a "better deal". (Of course, the lower ER makes for a somewhat "better deal", but that's not quite what is reflected in the *current* mutual fund share price differences.)
I suspect that this initially confused me, too, some years ago.

I suppose it could also be cropping up if someone compares the share prices of two different mutual funds of the same category (e.g, similar index funds at Fidelity and at Vanguard).

Is this something that should/could be addressed more in some background/introductory materials?
Of course, even finding various background materials at the very start isn't necessarily obvious, but still...
But right now, all that is happening is that the OP's are being "told" that the share price shouldn't matter.
That may not make sense. How often does "price not matter"? [Here on BH, of all places!? :shock: ] Why not/what does that mean?

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sport
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Re: Mutual Fund "share price"

Post by sport » Sun Oct 22, 2017 9:35 am

It's like taking a $100 check to the to the bank. The teller can give you five $20 bills, or twenty $5 bills. In either case, you get your $100 worth of cash. When you invest $100 in a mutual fund, you get $100 worth of shares.

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Re: Mutual Fund "share price"

Post by ResearchMed » Sun Oct 22, 2017 9:48 am

sport wrote:
Sun Oct 22, 2017 9:35 am
It's like taking a $100 check to the to the bank. The teller can give you five $20 bills, or twenty $5 bills. In either case, you get your $100 worth of cash. When you invest $100 in a mutual fund, you get $100 worth of shares.
Well, yes, *I* know that!

I'm concerned about others, especially "newbies" like the two OP's referenced above, including some who may not be asking explicitly.

How are *they* supposed to learn this?

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Re: Mutual Fund "share price"

Post by Sandtrap » Sun Oct 22, 2017 10:34 am

I am most likely reading your question incorrectly but here goes.

I have noticed in talking to investing newbies with limited funds that there is a concern about 'how many shares" they can buy with their limited funds.

I think there's a grasp of the "funds" at that level as similar to walking into a candy store with only a dollar and . . . there's a perception that one has "more" candy if one buys 100 tootsie rolls at a penny per, than 4 Mars bars at 25 cents each.
To take that analogy further. . there seems to be much concern about getting the most "value" for that dollar in hand. I believe it's a perception at that "newbie" or "level of understanding".

If this is correct, I agree that there needs to be a sort of simplification of steps toward DIY investment finance so to speak. Sort of like a newbie in a roomful of professional mechanics. The newbie doesn't know the difference between a box wrench and an open end wrench. To the mechanics, it's a given. To the "newbies", there's a WIKi on how to ask questions, but they don't even know "what" to ask. Difficult indeed.
Perhaps a WiKI on the correlation between share price and ???? That's a lot of handholding. Tough one.

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Re: Mutual Fund "share price"

Post by stan_the_man » Sun Oct 22, 2017 10:44 am

I agree that mutual fund share price is meaningless -- since you can buy fractional shares.

On the other hand, share price does matter for ETFs (Exchange Traded Funds), since you typically can't buy fractional shares and spreads (difference between what a share is sold and purchased for) are typically larger.

When it comes to fractional shares, for example, I can't buy VTI (Vanguard Total Stock Market ETF) if I have $100, since the share price closed at $132.42.

When it comes to spread, even a small $0.01 per share difference between the bid and ask gets magnified when you buy more shares because the share price is lower. In 2013, Vanguard did a reverse split of VOO (Vanguard's S&P 500 ETF) to increase the share price on the premise that it would reduce shareholders costs by reducing spreads (of course, this also made the ETF harder to invest in for small investors):

viewtopic.php?t=122943

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Re: Mutual Fund "share price"

Post by snarlyjack » Sun Oct 22, 2017 11:37 am

I believe that share price is a factor in purchasing consideration.

Let me give you some examples:

1). Their is a reason that companies/mutual funds do
share splits. (2 for 1, 3 for 1 splits). Their has been academic
studies that show investor prefer lower share prices better than
higher share prices, when they are buying a stock.

2). Last time I looked Berkshire Hathaway was selling for
something like $125,000. per share. That share price would
give me pause on investing in it or not.

I understand that mathematically it does not make a difference.
However, most companies want to make it easy for Grandma &
Grandpa to invest in them. Would my Grandma invest $125,000.
for 1 share of Berkshire Hathaway, I kind of doubt it...

3). It's all about psychology & making things easy for people.

MIpreRetirey
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Re: Mutual Fund "share price"

Post by MIpreRetirey » Sun Oct 22, 2017 2:31 pm

I'm surprised this isn't explained somewhere in the wiki; like under mutual funds, what are they.
There is some. Here's one of a few categories from searching the wiki for "mutual",

https://www.bogleheads.org/wiki/Mutual_fund

which explains that pooling many owners together, there is no problem of having enough money, together, of buying stocks of any price per share.

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Re: Mutual Fund "share price"

Post by dbr » Sun Oct 22, 2017 4:10 pm

Well, the price of a share can matter but certainly not in the sense introduced by the OP. The fallacy in question is that a higher share price is a more "expensive" share, as if a share were a fixed entity in all cases, like buying a donut or a car.

I guess I don't know where this is to be explained. It may be this is one of those little pieces of information that a person sooner or later acquires by mucking around reading and learning about investing. Maybe it is learned when one posts a mistaken concept on a forum and one is set straight. When I was in high school we had a calculus teacher who stressed to us that in the end you learn things by "stewwwing." He was from Louisana and he really did say it that way. He was right and it isn't different in the end here. You can't get it all by just expecting people to tell you the answer to all the questions.

OK So here is a suggestion. One way to address this in a book or a Wiki is to have a glossary and an item in the glossary can be share price and it can be explained there. But who reads a glossary?

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Re: Mutual Fund "share price"

Post by MIpreRetirey » Sun Oct 22, 2017 4:29 pm

I think glossary is a good note for it's function. But then I started thinking that would end up being more like a dictionary. So then I, personally, would go to googleing the web for mutual fund share price.

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Re: Mutual Fund "share price"

Post by dbr » Sun Oct 22, 2017 4:37 pm

MIpreRetirey wrote:
Sun Oct 22, 2017 4:29 pm
I think glossary is a good note for it's function. But then I started thinking that would end up being more like a dictionary. So then I, personally, would go to googleing the web for mutual fund share price.
Indeed. One part of stewwwing is looking things up to get a better understanding and extend one's knowledge. Not for the instant gratification crowd.

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Re: Mutual Fund "share price"

Post by David Jay » Sun Oct 22, 2017 4:44 pm

It's the difference of buying by units versus buying by volume. The confusion is that the newbie thinks that they are buying units (3 television sets) when they are purchasing by volume (a gallon).

I don't know how to get them past it, I often use the "4 quarts at a dollar each is the same as a gallon for four dollars".
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Re: Mutual Fund "share price"

Post by dbr » Sun Oct 22, 2017 4:47 pm

David Jay wrote:
Sun Oct 22, 2017 4:44 pm
It's the difference of buying by units versus buying by volume. The confusion is that the newbie thinks that they are buying units (3 television sets) when they are purchasing by volume (a gallon).

I don't know how to get them past it, I often use the "4 quarts at a dollar each is the same as a gallon for four dollars".
I think most people get it when the misconception is pointed out. Sometimes there is a person who is just a little more attached to a wrong idea about something.

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Re: Mutual Fund "share price"

Post by arcticpineapplecorp. » Sun Oct 22, 2017 4:49 pm

There was a recent post here viewtopic.php?f=10&t=228327 that asked that very question.

The way I think about this, in the end it's really percetages that matter, as was already said in this post. A stock trading at $100 that goes up 10% is then worth $110 while a stock that is worth $10 that goes up 10% is then worth $11. So some basic math is obviously involved and if someone is investing real money, isn't it worth it to do some basic math?

In the above example:

The $10,000 investment in a stock at $100 a share (purchases 100 shares) that then goes up 10% (to $110 a share) is worth $11,000 (still 100 shares but now each are $110 a share)
The $10,000 investment in a stock at $10 a share (purchases 1000 shares) that goes up 10% (to $11 a share) is worth $11,000 (still 1000 shares but now each are $11 a share).

No difference. It takes some math to do it, but this is something most people should have learned by what, 5th grade?

This lack of, or fear of math is seen all over the place, even in the financial media. The last two weeks the news media kept saying in the stock market crash of 1987 the DOW lost 508 points...and it was the worst single point loss in history until the great recession (9/29/2008). But so what? The DOW was at 1738 in 1987 and 10,365 in 2008 so it's apples to oranges and completely meaningless. It's percentages that matter, not points.

A 500 point drop when the DOW is at 5000 is a 10% drop but a 1000 point drop when the DOW is at 20,000 is a 5% drop. See, larger POINT drop, but smaller percentage drop. It's never mentioned in the media and they keep perpetrating ignorance upon the masses. So it's up to everybody to start doing basic math, and doing some critical thinking. Sorry if that seems harsh, but I see people wanting to be spoon fed information or told what to think and not draw their own conclusions. That's not good for anybody except those pushing a particular agenda.

viewtopic.php?f=10&t=230291#p3581766
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Re: Mutual Fund "share price"

Post by avalpert » Sun Oct 22, 2017 4:54 pm

David Jay wrote:
Sun Oct 22, 2017 4:44 pm
It's the difference of buying by units versus buying by volume. The confusion is that the newbie thinks that they are buying units (3 television sets) when they are purchasing by volume (a gallon).

I don't know how to get them past it, I often use the "4 quarts at a dollar each is the same as a gallon for four dollars".
This isn't a confusion limited to 'newbies' - it is one that sits at the core of some of the more persistent discussions here such as dividend reinvestment, dollar cost averaging and buying shares 'on sale'.

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Re: Mutual Fund "share price"

Post by dbr » Sun Oct 22, 2017 4:59 pm

avalpert wrote:
Sun Oct 22, 2017 4:54 pm
David Jay wrote:
Sun Oct 22, 2017 4:44 pm
It's the difference of buying by units versus buying by volume. The confusion is that the newbie thinks that they are buying units (3 television sets) when they are purchasing by volume (a gallon).

I don't know how to get them past it, I often use the "4 quarts at a dollar each is the same as a gallon for four dollars".
This isn't a confusion limited to 'newbies' - it is one that sits at the core of some of the more persistent discussions here such as dividend reinvestment, dollar cost averaging and buying shares 'on sale'.
That is true. In the end it is an aspect of numeracy that has to do with mentally forming the right mathematical model for the situation. It is at the heart of the problem where people who can do arithmetic are absolutely boggled (not Bogled) when challenged to apply arithmetic to the world. It could even be that the idea of forming a mathematical model of a situation is a step in abstraction that is difficult for people to rise up to.

ResearchMed
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Re: Mutual Fund "share price"

Post by ResearchMed » Sun Oct 22, 2017 5:03 pm

dbr wrote:
Sun Oct 22, 2017 4:10 pm
Well, the price of a share can matter but certainly not in the sense introduced by the OP. The fallacy in question is that a higher share price is a more "expensive" share, as if a share were a fixed entity in all cases, like buying a donut or a car.

I guess I don't know where this is to be explained. It may be this is one of those little pieces of information that a person sooner or later acquires by mucking around reading and learning about investing. Maybe it is learned when one posts a mistaken concept on a forum and one is set straight. When I was in high school we had a calculus teacher who stressed to us that in the end you learn things by "stewwwing." He was from Louisana and he really did say it that way. He was right and it isn't different in the end here. You can't get it all by just expecting people to tell you the answer to all the questions.

OK So here is a suggestion. One way to address this in a book or a Wiki is to have a glossary and an item in the glossary can be share price and it can be explained there. But who reads a glossary?
I admit isn't not at all easy to figure out how or where to provide this information "in advance", before someone asks or makes an incorrect assumption (which is, after all, easy to understand, when someone is really just barely learning about all of this).

As for even a glossary entry, in a new area, there are plenty of times that one doesn't even know to try to look something up. Either one doesn't know the term/concept - and so obviously cannot "look it up" - or one assumes that the term use is no different from regular daily speech - and so one wouldn't think to "look it up".

I don't know that there is a solution.
But IF there is a place to offer a definition/explanation, it might be helpful for some.

I was just really struck by the two separate times this came up very recently.
And I found the situation odd, here on BH, where in almost every other way, we DO focus on being very conscious of "price". And yet, the responses were basically that "price doesn't matter" (and without much explanation).
David Jay wrote:
Sun Oct 22, 2017 4:44 pm
It's the difference of buying by units versus buying by volume. The confusion is that the newbie thinks that they are buying units (3 television sets) when they are purchasing by volume (a gallon).

I don't know how to get them past it, I often use the "4 quarts at a dollar each is the same as a gallon for four dollars".
I like this a lot: units vs volume.
[But I had to laugh about the thought of "a gallon of TV sets" :D ]

I guess it's like different sized "batches" (for lack of a better term) of a fixed ratio of all the included stocks (where fractional "bits" of a stock are allowed; this may not be obvious to newbies initially, either).
Does that make sense?

The problem remains of where to put the definition/description, as mentioned just above.

It's really difficult sometimes to realize how much one learns/absorbs over time, to think how little we once understood about all of this, for most of us... and thus to realize how a bit more explanation might help when someone (newbie or not) posts something indicating a genuine misunderstanding.
Just writing something like "price doesn't matter here" isn't particularly helpful.

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Re: Mutual Fund "share price"

Post by dbr » Sun Oct 22, 2017 5:10 pm

ResearchMed wrote:
Sun Oct 22, 2017 5:03 pm

Just writing something like "price doesn't matter here" isn't particularly helpful.
You are correct with your complaint above. Writing an obscure aphorism isn't helpful. But then you know my position on reasoning by metaphor and aphorism. A statement like that can be improved by saying something that is more helpful such as that what does matter is the amount of money you invest and the prospects for that investment to grow. Then you have to add the detail that amount invested = # of shares * price of a share. Of course at that point one has introduced a mathematical expression which is either enlightening or cuts the discussion dead as eyes glaze over.

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Re: Mutual Fund "share price"

Post by nisiprius » Sun Oct 22, 2017 5:10 pm

A related issue is the surprising number of people who casually enter bond fund ticker symbols into online tools designed to show stock prices, and conclude that over the past twenty years, Total Stock (VTSMX) made twenty-five times as much money as Total Bond (VBMFX).

I honestly think that ignoring fund dividends and looking at price per share is one of the reasons why some people think that bond investing makes no sense.

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Re: Mutual Fund "share price"

Post by TD2626 » Sun Oct 22, 2017 7:01 pm

nisiprius wrote:
Sun Oct 22, 2017 5:10 pm
A related issue is the surprising number of people who casually enter bond fund ticker symbols into online tools designed to show stock prices, and conclude that over the past twenty years, Total Stock (VTSMX) made twenty-five times as much money as Total Bond (VBMFX).

I honestly think that ignoring fund dividends and looking at price per share is one of the reasons why some people think that bond investing makes no sense.

Image
Yes - one should use a tool that shows total return (e.g. reinvestment of dividends and income distributions) by default. Price-only data is generally for more advanced situations. There should of course be the option to use price return only - it's relevant if one isn't reinvesting the income, or if one is trying to estimate capital gains in taxable. For most situations, though, looking at a total return chart is best... and I've learned to always check when I see a chart if it's price return or total return.

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Re: Mutual Fund "share price"

Post by Johm221122 » Sun Oct 22, 2017 7:23 pm

snarlyjack wrote:
Sun Oct 22, 2017 11:37 am
I believe that share price is a factor in purchasing consideration.

Let me give you some examples:

1). Their is a reason that companies/mutual funds do
share splits. (2 for 1, 3 for 1 splits). Their has been academic
studies that show investor prefer lower share prices better than
higher share prices, when they are buying a stock.

2). Last time I looked Berkshire Hathaway was selling for
something like $125,000. per share. That share price would
give me pause on investing in it or not.

I understand that mathematically it does not make a difference.
However, most companies want to make it easy for Grandma &
Grandpa to invest in them. Would my Grandma invest $125,000.
for 1 share of Berkshire Hathaway, I kind of doubt it...

3). It's all about psychology & making things easy for people.
I think mixing an individual stock price(Berkshire Hathaway)and mutual fund NAV would complicate this subject

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Re: Mutual Fund "share price"

Post by dbr » Sun Oct 22, 2017 7:26 pm

TD2626 wrote:
Sun Oct 22, 2017 7:01 pm


Yes - one should use a tool that shows total return (e.g. reinvestment of dividends and income distributions) by default. Price-only data is generally for more advanced situations. There should of course be the option to use price return only - it's relevant if one isn't reinvesting the income, or if one is trying to estimate capital gains in taxable. For most situations, though, looking at a total return chart is best... and I've learned to always check when I see a chart if it's price return or total return.
Yet the standard chart on a typical financial website is the price chart. A result is that the inexperienced investor might be led to think that as a matter of course this is the data he/she wants. But the chart is just what it claims to be, a history of the price at which that entity traded, in accord with the number quoted on the same website for the current market price. It is all straightforward but unfortunately the wrong numbers for the uses we are interested in.

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Re: Mutual Fund "share price"

Post by TD2626 » Sun Oct 22, 2017 7:36 pm

dbr wrote:
Sun Oct 22, 2017 7:26 pm
TD2626 wrote:
Sun Oct 22, 2017 7:01 pm


Yes - one should use a tool that shows total return (e.g. reinvestment of dividends and income distributions) by default. Price-only data is generally for more advanced situations. There should of course be the option to use price return only - it's relevant if one isn't reinvesting the income, or if one is trying to estimate capital gains in taxable. For most situations, though, looking at a total return chart is best... and I've learned to always check when I see a chart if it's price return or total return.
Yet the standard chart on a typical financial website is the price chart. A result is that the inexperienced investor might be led to think that as a matter of course this is the data he/she wants. But the chart is just what it claims to be, a history of the price at which that entity traded, in accord with the number quoted on the same website for the current market price. It is all straightforward but unfortunately the wrong numbers for the uses we are interested in.
One thing is sadly too many people are interested in short-term speculative trading. Those doing short term trading would probably want price charts. The financial industry and media's desire to cater to short-term traders probably drives price return chart usage. However, short-term trading isn't a good idea. Staying the course in buy and hold investments is central to the Boglehead philosophy.

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Re: Mutual Fund "share price"

Post by TD2626 » Sun Oct 22, 2017 8:00 pm

Johm221122 wrote:
Sun Oct 22, 2017 7:23 pm
snarlyjack wrote:
Sun Oct 22, 2017 11:37 am
I believe that share price is a factor in purchasing consideration.

Let me give you some examples:

1). Their is a reason that companies/mutual funds do
share splits. (2 for 1, 3 for 1 splits). Their has been academic
studies that show investor prefer lower share prices better than
higher share prices, when they are buying a stock.

2). Last time I looked Berkshire Hathaway was selling for
something like $125,000. per share. That share price would
give me pause on investing in it or not.

I understand that mathematically it does not make a difference.
However, most companies want to make it easy for Grandma &
Grandpa to invest in them. Would my Grandma invest $125,000.
for 1 share of Berkshire Hathaway, I kind of doubt it...

3). It's all about psychology & making things easy for people.
I think mixing an individual stock price(Berkshire Hathaway)and mutual fund NAV would complicate this subject
Share prices don't really matter that much in most cases. (Changes in share prices over time, of course, matter). Companies can change share prices at will with share splits or reverse splits with little to no effect long term (assuming markets are efficient). Sure, mabye there could be a short term effect. Mabye that 1-20 reverse split signals to investors that a company's in trouble. Mabye a lower/higher share price helps by opening investment up to more people or reducing spreads. These are small effects though. To first order, share price level doesn't really matter within wide limits. (Of course, stocks with share prices below $1 are generally preposterously risky "penny stocks" and something with a very, very high price (BRK.A) is likely not the share class an ordinary retail investor would buy.

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