Fund costs vs. performance

[LRAO]

Hello once again.

When looking at funds to add to my portfolio, here's a question for you all:

How much more important are costs (loads/expense ratio) vs. performance?

I mean, if Vanguard has a fund that is NL with an ER of 0.20, but has returned 5% (annualized) over 10-years and Company X has a fund that is NL with an ER of 1.50, and has returned 11.5% over that same 10-year period, wouldn't it be THAT MUCH BETTER to bite the cost bullet with a proven winner?

[cute fuzzy bunny]

That depends on what they both are going to do over the next ten years...

[Berkshire_Bull]

why not pick some individual stocks and have a low expense rate plus you either win or lose on your own? might be either a humbling or an empowering experience. how savvy do you take yourself to be !!!

[unclemick]

Bogle(and others) has done some studies to show that 'proven winners' have a tendency not to repeat from decade to decade.

What you want is a proven relatively low expense dog that's going to become a winner.

Then - there's the 'value premium' that tends to persist.

Different strokes for different folks and an ongoing subject/s for debate.

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Hello once again. When looking at funds to add to my portfolio, here's a question for you all: How much more important are costs (loads/expense ratio) vs. performance? I mean, if Vanguard has a fund that is NL with an ER of 0.20, but has returned 5% (annualized) over 10-years and Company X has a fund that is NL with an ER of 1.50, and has returned 11.5% over that same 10-year period, wouldn't it be THAT MUCH BETTER to bite the cost bullet with a proven winner?

This question is answered fully and completely in Bernstein's Book 'The four Pillars of Investing'.

[gratefuled]

If you're evaulating historical performance, don't forget to consider the quality and continuity of the fund's management.

[wabmester]

In another thread, Nords said something like "at least those hawking stocks don't try to sell you a warm and fuzzy feeling." Historical returns are the warm and fuzzy of mutual fund marketing.

There are really only two things historical returns can tell you (I'll save you the cost of a Bernstein book):

1) The relative risk premium historically paid for a given asset class

2) The relative volatility of that asset class

All of the rest is mostly noise, but Bernstein takes it a little too far IMHO and tries to convince you that it's fruitless to try to beat index funds. There's plenty of data he ignores that kills that argument.

[preben]

If there IS an index fund for the asset class I want - I take that. If not I look at the cheapest managed funds. If nothing cheap (E.g. foreign small cap value....) I hesitate splitting my EFA for a fund with 5-6 times the E/R. Still hesitating... Cheers!

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All of the rest is mostly noise, but Bernstein takes it a little too far IMHO and tries to convince you that it's fruitless to try to beat index funds. * There's plenty of data he ignores that kills that argument.

Hey Wab, OK I'll give you that if a guy as smart as you you spends as much time as you thinking about investing and the market, you can probably beat the market.

But if an average shmuck like myself, who would rather go fishing and othewise live life to its fullest and do OK sticks with index funds instead of trying to beat the market, will probably do better.

Will you give me that?

[wabmester]

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Hey Wab, OK I'll give you that if a guy as smart as you you spends as much time as you thinking about investing and the market, you can probably beat the market.

I don't think you have to be that smart. For example, DFA uses a couple of techniques to consistently beat public indices (like those tracked by Vanguard):

1) When a public index makes changes in composition, investors will trade on that information. This punishes the fund by making new additions more expensive and makes index deletions sell at a discount by the time the fund unloads them. DFA avoids this by composing their own index rather than following some public index.

2) They also filter out proven losers from their funds, which other "pure" index funds may blindly include. For example, it's well known that IPOs of unprofitable companies are born losers, so they avoid holding them.

These are just a couple of examples available in my soon-to-be self-published tome: Indexing Shmindexing.

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I don't think you have to be that smart.

I give up :

[wabmester]

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I give up :

What do I win!?

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What do I win!?

The second annual 'blow me' post. ***** won the first.

[wabmester]

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The second annual 'blow me' post. ***** won the first.

I'm honored. It's only fair that you should win something too. Congrats to Cut-Throat, Bernstein Bible Thumper of the Year!

Now I believe our ER Smack-Down roster is complete:

In the Mortgage Heavy Weight division, we have TH vs SalaryGuru.

In the Caribbean Light Weight match, it's GDER vs NFS.

In the Feather Weight class, Cut-Throat plays tag-team with William Bernstein and takes on all comers.

And finally, in the Ghost Weight class, ***** takes on himself!

Hey wab. Still on the diet (sort of). Had my blood drawn today and will report the results in about a week.

I'm a bit hurt that you left me out of your Smackdown match-ups.
If it's not too late, I would like to go one on one with arrette

John Galt

[cute fuzzy bunny]

John, you stand alone and unchallenged in the Ego weight class.

And I dont need to be included in any 'smack downs'. I just thought it would be nice to be able to have a nice adult multi-sided discussion on a topic that has a lot of facets.

In the end I did learn something interesting though. After discussing it here and on other boards, I'm surprised to find that there are a fair number of people who own 100% stocks and no fixed income investments.

Thats pretty intriguing and bears some thought. Once upon a time I was an 80:20 investor and went to 100% stocks during the late 90's bull only to come back to a 60:40 after the 2000 crash. I remember Peter Lynch saying "Bonds are for idiots" or some such back in the 90's. Given the low rate of returns on bonds these days, maybe its the right way to go. Plow it all into stocks, pray to the ghost of returns past and "swing for the fences" as Raddr said.

Kinda scary though...

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Thats pretty intriguing and bears some thought. Once upon a time I was an 80:20 investor and went to 100% stocks during the late 90's bull only to come back to a 60:40 after the 2000 crash. I remember Peter Lynch saying "Bonds are for idiots" or some such back in the 90's. Given the low rate of returns on bonds these days, maybe its the right way to go. Plow it all into stocks, pray to the ghost of returns past and "swing for the fences" as Raddr said

I think if your investment horizon is 30 years or more, stocks will return more than bonds. And if you can hack the volatility 100% in stocks will probably return more.

The problem is that if you decide that your 100% stock allocation is wrong after a 30% market correction and become a 60/40 investor. This was a similar move that you made after the 2000 correction.

I can no longer hack the volatility of 100% stocks. It's gonna be tough enough to hack the volatility of a 60/40 portfolio.

[cute fuzzy bunny]

Actually I became a 0/0 investor in january of 2000 and didnt go into the 60/40 until after most of the damage was done.

That worked out pretty good.

Yeah, yeah, yeah...burn the dirty market timer at the stake...

[unclemick]

The only time in my 401k - I abandoned my general Ben Grahamesque 50/50 - was after the 1987 non event - went 100% S&P 500 - impelled by greed until 1993 - when I rolled to IRA. The - 22% one day drop turned out to be a knit.

There's a one line zinger in Frank Armstrong's book (used to be online for free) - "The rich live off dividends." Trumps everything else in the book - heh, heh, heh - if you have the guts. 15% is as far as I've been willing so far. Never say never though - but not today.

Now a large market drop with dividends back equal or above their historic trendline - Hmmmmmm?

[azanon]

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How much more important are costs (loads/expense ratio) vs. performance? I mean, if Vanguard has a fund that is NL with an ER of 0.20, but has returned 5% (annualized) over 10-years and Company X has a fund that is NL with an ER of 1.50, and has returned 11.5% over that same 10-year period, wouldn't it be THAT MUCH BETTER to bite the cost bullet with a proven winner?

I didnt see anyone directly answer your question so I will.

The returns you see quoted anywhere for any fund, be it index or active managed, take into account the ER. *So, using your example above, the second fund is beating the first by 6.5%, despite the higher ER. *

My take is i'd avoid load funds. *To pay at the outset is a bad deal cause you have to be in the fund a while before you even break even. *

As for expense ratios/actively managed funds, i've addressed that a few times now. *Yes it may be true index funds beat 80% of actively managed funds, but its also true than when you pick your active managed fund, you're not forced to randomly select one. *There is nothing illegal at all about using any number of screens at good mutual fund picking sites to pick a modern day Peter Lynch fund manager, and you're completely entitled to not feel guilty about consistently beating an S&P 500 index fund. * *

As an alternative, there are also "mimic" actively managed funds like American Century Equity Growth (BEQGX) that mimic the S&P500, but use a little bit of human brainpower to "enhance" the return. * In that particular case, BEQGX is beating the S&P500 by 0.23% over a 10 year period, and that lead doesnt take into account the usual 0.2% expense ratio of an S&P500 index fund, so you're looking at an extra 0.43% over 10 years. *Run a few retirement models over 30 years, and you'll find out an extra 0.43% is nothing to sneeze at.