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Another newbie question re: expense ratios
Old 11-14-2013, 01:04 PM   #1
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Another newbie question re: expense ratios

I have read the advice here and on the boglehead forums and in the recommended books (Millionaire Teacher) to invest in the lowest fee index funds. But is that the only thing to look at when making the choice(s)?

In looking at my 401K fund options with Vanguard (I tried to attach to this post, not sure if successful), they list not only expense ratios, but performance over 1, 5, 10 year returns (I know, past performance is not a future indicator of future performance) and also have some information on how many stocks are included in the index, what type - like mid cap, small cap, etc.

For me, the novice and super disorganized/lazy investor just trying to figure out a path forward, it would seem easiest to just pick a total market index fund with the lowest expense ratio. Pick a broad-based intl index fund with the lowest ER and then ditto for the bond fund. So all things being equal, do I just pick the lowest ER total index fund and not look at past performance or other fund info?

On a positive note, since I have taken on trying to learn about how to fix our retirement and budget better, we discovered yesterday that DH has an old rollover IRA from years back that we totally forgot about - we don't get mailed statements and it sort of fell off the radar (...sad, I know. We are THAT BAD in dealing with our finances ...but I'm trying to fix that!). It has grown a lot (almost 100K!), just sitting there untouched for years, invested in 100% vanguard stock index funds. Kind of like finding money in an old winter coat - but way better! It puts us closer to an earlier retirement.

Thanks for input.

Short Term Reserves and Bond Funds.PNG

Stock Funds.PNG
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Old 11-14-2013, 01:28 PM   #2
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I'm certainly no investment pro and have been fairly lost at times, but never to the point where I misplaced a $100K sheltered account . Glad to hear you are trying to get it together.

Maybe the best thing for you is to find a fee only financial adviser and get a professional plan put together first.
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Old 11-14-2013, 01:32 PM   #3
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I do what you are saying. Pick your target asset allocation and then find the index fund to match it. Vanguard is my choice for funds I can control. My 401k and SERP plan are in S&P500 Index funds. One is Vanguard with very low fees and one isn't with a 0.4% mgmt fee.
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Old 11-14-2013, 01:36 PM   #4
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You have some very good funds there. I have invested (and still am) in a lot of those listed. Since I like to hedge my bets (and lets face it, they are bets of sorts whenever you shell out money to anyone) I'd put 20% in 2 International funds, 40% in 2 US Domestic funds, 35% in 2 Bond funds and the remaining 5% in short term funds. Then just rebalance a couple times a year. You could do a lot worse.
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Old 11-14-2013, 01:39 PM   #5
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Quote:
Originally Posted by aja8888 View Post
I'm certainly no investment pro and have been fairly lost at times, but never to the point where I misplaced a $100K sheltered account . Glad to hear you are trying to get it together.

I seriously almost did not include this in my post. It is embarrassing to admit. But also a truthful indication of our (past) investment approach.
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Old 11-14-2013, 01:48 PM   #6
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Looks like you want VIIIX for S&P 500, VEMPX to cover U.S. except S&P 500, and VFWPX to cover international. Then add VBMPX for bonds as desired. Those should all fit together nicely, though you'll need to do a little research to figure out the VIIIX/VEMPX split that matches the full U.S. market.

No Vanguard Target Retirement fund? That would be the easiest way to go.
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Old 11-14-2013, 01:59 PM   #7
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No Vanguard Target Retirement fund? That would be the easiest way to go.
Actually, target funds are available. I'm just not sure how you pick them - with your target date of retirement? With how long you think you'll like in retirement? Also the ERs are a bit higher than some of the other index funds.

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Old 11-14-2013, 02:13 PM   #8
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I think turnover is another important issue to look at, as well as tracking error. Bid-ask spreads and market frictions don't show up in the expense ratio, but they do show up in the tracking error- how much the fund, net of expenses, underperforms the index.
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Old 11-14-2013, 02:34 PM   #9
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......... it would seem easiest to just pick a total market index fund with the lowest expense ratio. Pick a broad-based intl index fund with the lowest ER and then ditto for the bond fund. So all things being equal, do I just pick the lowest ER total index fund and not look at past performance or other fund info?........
This approach will put you ahead of 90% of other investors. But Vanguard doesn't send out birthday cards.
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Old 11-14-2013, 02:39 PM   #10
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Actually, target funds are available. I'm just not sure how you pick them - with your target date of retirement? With how long you think you'll like in retirement? Also the ERs are a bit higher than some of the other index funds.

Attachment 17481
Good. The main difference is how much stocks versus bonds each one has. You should be able to check that out at Vanguard.com. I like lots of stocks, so I'd pick the very latest date, and probably keep switching to the newest one as they are added. You can pick an actual retirement date, but for ER I'd pick the date you turn 65 or 70. At least your choices boil down to a single dimension, and it's just one fund. Easy, simple, diversified.

If you want to weight international or small/mid caps more, then you can use the four funds I pointed out earlier. If you want to try active funds, you can pick one of the pricier funds (just be sure to have some balance between U.S./International/small and mid caps). But I'd start with the target date and then move on when it looks too limiting to you.
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Old 11-14-2013, 02:44 PM   #11
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I am great fan/investor in Vanguard but lately I see great things coming from
Schwab as well. Schwab beats Vanguard in some of it's ETFs.
SCHB, SCHX, SCHZ.....

BTW I am buyer/owner of SCHD. Another great ETF from Schwab.
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Old 11-14-2013, 02:46 PM   #12
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Here's the problem with looking at only expense ratios.

I used to work on an Equity Sales and Trading desk. I was the programmer there. In order for these ETFs and mutual funds to stay index funds, they have to trade stock to track the index. And some of these funds pay a wider bid/ask than others. These trading costs don't count as part of expense ratios.

Wisconsin Teachers Retirement System (they are a pension fund) would call up and want to execute a trade. They would get one price.

Fidelity ("Fido") would call up and get another price.

Vanguard would call up and get a third price.

DE Shaw or Citadel would call up, the trader would take two minutes of heart-pounding analysis, and give a fourth price.

Up to a certain point, the more sophisticated a fund got, the narrower the bid/ask it got from the trader. And every dollar less that Vanguard or Schwab pays to buy more INTC or XOM or AAPL from the investment bank when the index allocations change, is a dollar that stays in the pockets of its investors.

Expense ratios probably drive much of the tracking error if they're measured in tens of basis points, but I'd rather see folks look at returns on the NAV of the fund vs returns of the index it purports to track.
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