Could someone help explain these Mutual Fund expenses?

[FinanceDude]

Originally Posted by youbet

Yeah.... like I said, paying for well defined active management (at the right price or ER) can make sense. Paying loads..... no. Too many well run no load funds out there.

You can buy load funds at NAV, but of course there would be a quarterly management fee...........

[innova]

BTW, with regard to index funds, I always get a chuckle from Scott Burns and his "couch potato" portfolio. Initially, it was buy two funds, balance them and call it a day. However, when this started to underperform almost everything else in existence, he started adding more and more indexes. Now he's got what, six or seven different portfolios and even works for a management company that charges an annual fee to move around those funds that were supposed to be, "set 'em and forget 'em". At the end of the year, he does his compilation, and it usually results in, "well you got this return, but IF you had just added THIS, then your return would have been higher.

Some have accused Burns of selling-out because he works for a financial management company. I think its really not necessary to have an adviser if you understand the reasons for picking the funds you pick, but thats just me.

On his portfolios:
They are all designed to be 'set and forget'. Part of the reason they evolve over time (from 2 asset class up to about 8 or so) is because certain asset classes were not readily available in the past (International small companies, for example) and can now be inexpensively invested in. It does appear at first glance he is changing his recommendation every year based on the flavor of the day.. I'm not sure if this is the case or not.

There is a point where you start hitting diminishing returns. Adding a 4th low-correlation asset class to an existing portfolio is likely to be a significant benefit, whereas adding the 9th will hardly matter in returns while adding complexity.

One point you can derive from his writings is while even a simple 60%eq/40% bond porfolio will outperform most active funds over long stretches, there is certainly room for improvement. The best introductory article I've ever seen that details this out is from Paul Merriman here:
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Link may be down - have to hit google cache to read it. I don't advocate everything Merriman says (he believes in market timing using 200 day moving average), but this article is a good demonstration of what Scott Burns writes about with respect to adding different asset classes and how they impact a portfolio.

In any case, you should try to decide your strategy and stick with it. If you decided that international small cap was desired but not available, you may add it when it becomes available (even through a managed fund if necessary), but adding it just because it had done well is not a good reason.

[Marquette]

Originally Posted by Art G

I'd say, the problem on this board is that there are too many trying to retire frugally and not enough taking Carribean cruises. Most of the retirees I know, don't have time nor desire to trade their mutual funds daily. They've got golf and gin games to get to.

Most of the retirees I know are old and retire on-time.

[youbet]

Originally Posted by FinanceDude

You can buy load funds at NAV, but of course there would be a quarterly management fee...........

Oh, I know they have many classes of funds and sales people try to show you one where it looks like paying the sales load/commission won't hurt. But, gosh, there just isn't any need to pay sales commissions when there are index and actively managed funds you can purchase without involving sales commissions.

I do agree with you on actively managed funds. Some can serve a purpose. But, there's no reason to pay commissions to a sales person to buy one. Too many outstanding passive and actively managed funds out there available without sales commissions.

[innova]

FD, can you explain what you mean:

I think cap-weighting is stupid, it in effect cancels out the index's main reason for being, well, and INDEX.

If MSFT has a "bad day", then the Dow drops 100 points? That's stupid...........

What is the indexes main reason for being?? What is your beef against cap-weighting?

The DOW only drops 100pts if MSFT has a bad day and everyone else has a bad or neutral day. Conversely if the rest do well and MSFT has a bad day the DOW rises. You totally lost me on that one.

[cute fuzzy bunny]

Unless I'm mistaken...one of the problems with equal weighting is that there simply arent enough available shares of some of the companies to provide for the existing index mutual funds were they to change from cap weighting to equal weighting.

[cute fuzzy bunny]

And would you really like to own as much of these:

Brunswick
OfficeMax
Bear Stearns
Ambac Financial Group
Meredith
Dillard's

As these:

ExxonMobil
General Electric
AT&T
Microsoft
Procter & Gamble

?

S&P 500 (TM) Index Component Weights Sorted by % Weight in the Index - indexArb.com

[saluki9]

Originally Posted by cute fuzzy bunny

Unless I'm mistaken...one of the problems with equal weighting is that there simply arent enough available shares of some of the companies to provide for the existing index mutual funds were they to change from cap weighting to equal weighting.

You would be correct. Of course this is a problem more common the broader the index is. This is the reason that equal weighted index funds have to use more complex sampling than that of cap weighted funds.

[cute fuzzy bunny]

...and then when you have someone picking and choosing which companies will and wont be in the "index", its not really as good an "index" and is more like a managed fund...

[innova]

From what I've read I came to the conclusion that on paper, equal-weighting would be superior based on history, but is both expensive and difficult to implement in real life. Can you imagine trying to equal-weight the wilshire 5000?

[cute fuzzy bunny]

Its also interesting to note that the folks excited about active momentum investing have a lot in common with the index investor.

As companies get larger and grow faster, the index increases their cap weighting and buys more shares. As companies start to get smaller and shrink, the index reduces cap weighting and ownership.

So it turns out that index funds really are sort of slow pitch softball versions of momentum funds. But you dont get to buy newsletters and hand pick stocks yourself, which makes it a lot less interesting as a hobby.

[cute fuzzy bunny]

Originally Posted by innova

From what I've read I came to the conclusion that on paper, equal-weighting would be superior based on history, but is both expensive and difficult to implement in real life. Can you imagine trying to equal-weight the wilshire 5000?

Yeah not possible. The bottom 1000 companies wouldnt even be able to manage a small percentage of the demand.

And then you have to consider the effect of that equal weighting. A lot less shares of larger companies would be held and a lot more shares of smaller companies would be held. What effect would that have on their share prices in both the short and long term?

Hmmmm....

Seems that what the equal weighting does is pick up more shares of small and value companies. Something you can do on your own by taking a 50% holding in the weighted s&p 500 and a 50% holding in the wilshire 4500, or adding a chunk of small cap value.

Someone (Alec?) was talking a while back about using the wilshire 4500 as a primary holding and skipping the s&p 500. Some of the top holdings in the 4500 index actually qualify as large cap stocks and you end up with a much heavier weight of mid and small cap stocks. The breakdown of the 4500 has a nice smooth mix of large, mid and small cap companies.

Isnt it always something...?

[FinanceDude]

Originally Posted by innova

FD, can you explain what you mean:
What is the indexes main reason for being?? What is your beef against cap-weighting?

The DOW only drops 100pts if MSFT has a bad day and everyone else has a bad or neutral day. Conversely if the rest do well and MSFT has a bad day the DOW rises. You totally lost me on that one.

Well, for one thing, if MSFT has a bad day, it drags down the rest of the tech stocks. It's a domino effect of sorts. I don't know the weighting averages for all the indexes, but the indexes were NOT always cap-weighted, that's a more recent phenomenon.

To me, the BIG cap-weighted stocks like MSFT have TOO much influence on the markets. That is not to say MSFT is not important to investors, I just question HOW much it needs to be...........

[Art G]

Originally Posted by Marquette

Most of the retirees I know are old and retire on-time.

LOL! On time?? What the heck does that mean? My on time would have been the day I graduated college.

[Art G]

Originally Posted by cute fuzzy bunny

Its also interesting to note that the folks excited about active momentum investing have a lot in common with the index investor.

As companies get larger and grow faster, the index increases their cap weighting and buys more shares. As companies start to get smaller and shrink, the index reduces cap weighting and ownership.

So it turns out that index funds really are sort of slow pitch softball versions of momentum funds. But you dont get to buy newsletters and hand pick stocks yourself, which makes it a lot less interesting as a hobby.

Perhaps, but the difference is, you don't have a manager buying a fund cause he's gotta.

[Art G]

Originally Posted by FinanceDude

Well, for one thing, if MSFT has a bad day, it drags down the rest of the tech stocks. It's a domino effect of sorts. I don't know the weighting averages for all the indexes, but the indexes were NOT always cap-weighted, that's a more recent phenomenon.

To me, the BIG cap-weighted stocks like MSFT have TOO much influence on the markets. That is not to say MSFT is not important to investors, I just question HOW much it needs to be...........

That's true. Many S&P funds end up being ...

ExxonMobil
General Electric
AT&T
Microsoft
Procter & Gamble

and then a little bit of some other stuff.
Almost 20% of your entire portfolio is the top 10 stocks.

[cute fuzzy bunny]

This thread is a lot more informative with judicious use of the ignore list...

[REWahoo]

I'm sorry, did you say something?

[cute fuzzy bunny]

Anyone feel a breeze?