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One diversified low fee fund vs DIY diversity w/ higher fees?
Old 02-19-2013, 10:17 AM   #1
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One diversified low fee fund vs DIY diversity w/ higher fees?

When I first enrolled in my 401k, I didn't know anything and basically put almost all of my allocation into one fund (CREF-Stock). I now know that I should have a diversified portfolio, but I'm struggling with the fees that go with that. The CREF-Stock fund has a relatively low fee (.49%) and is diversified as follows: :
71.4% United States
21.9% Foreign - Developed
6.7% Foreign - Emerging
and
34.3% Mega-cap: over $50 billion
25.4% Large-cap: $15 billion–$50 billion
31.0% Mid-cap: $2 billion-$15 billion
9.3% Small-cap: under $2 billion

If I try to achieve diversification through multiple funds, I have control over the percent allocated to each area, but pay much higher fees. Here are the fees associated with specific funds:
1.23% Large-Cap Growth
1.22% Large-Cap Value
1.28% International
0.90% Small-Cap Blend
1.24% Mid-Cap Growth

So which is better, one diversified fund with low fees or several funds with higher fees, but I control the allocation?

FWIW, the 5yr and 10yr performances of all of these funds are within 1% of each other. Also, this question pertains only to how I am allocating the equity portion of my overall allocation.

Thank you for any advice on this matter.
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Old 02-19-2013, 11:00 AM   #2
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I'm not seeing a big incentive to move out of CREF-Stock, given the alternatives' high fees and lack of a history of superior long term performance.
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Old 02-19-2013, 11:02 AM   #3
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If you moved from the single fund which invests in a diversified portfolio of equities to multiple funds each investing in a single asset class, how would you allocate your investments in these funds? Fox example, with the single fund you are now 9.3% small cap. What percentage would you allocate to small cap using the focused assest class funds? Amongst all asset classes, where would the major differences be and why?

Just trying to understand how your extensive research has led you to believe you want to have an AA substantially different than what you're getting with the CREF stock fund.

If your reasoning is sound and you strongly believe that you want a significantly different AA than the CREF stock fund provides, I'd pay the higher ER and move. If you're considering going to the individual focused funds based just on a feeling you might do something with your AA that's substantially different in the future, I'd stay with the CREF for now.
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Old 02-19-2013, 11:05 AM   #4
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Not a financial advisor, but IMHO you have VERY strong desire to personally direct your 401k I would leave it in the single large diversified fund with a long history of stability & low fee. You state the performances have been very similar over time, so why add the hassle (& apparently higher fees) of switching to multiple funds?
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Old 02-19-2013, 11:12 AM   #5
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I think you can do even better on fees. I just had Vanguard do a financial plan for me. They came up with 14 funds in the plan with an overall 0.14% expense ratio. I don't think a 0.49% fee is particularly cheap. The 1.0 to 1.3% fees certainly are not cheap. I think I'd shop a little an try to keep your fees as low as possible.

If you are going to choose between the two options you present, I'd stick with the CREF-Stock fund because it is chepear, and I don't see you gaining much with the multiple funds covering the same sectors as the single fund.
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Old 02-19-2013, 11:13 AM   #6
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Plus 1 on the leave it in one fund...

It seems very diversified... if you think there are some sectors you think should have more money invested, then just invest some money in that one fund (or two if you think there are two)...


IOW, if you feel you must tinker, leave the vast majority of your funds in the single low cost fund and then work on the margins with the higher cost funds to get where you want to be... that way you still have a big chunk in the low cost fund...
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Old 02-19-2013, 11:14 AM   #7
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Quote:
Originally Posted by ERhoosier View Post
why add the hassle (& apparently higher fees) of switching to multiple funds?
If his own research and beliefs regarding future performance of equity asset classes differs significantly from the folks managing the CREF equity fund, that would be a good reason to switch to focused funds and execute your own plan. But if his research and feelings are not all that extensive and strong, or if there are not real differences between his AA plans and the CREF folks, perhaps he'd be better off staying where he is.

OP's question regarding whether the higher ER's to own the focused funds were worth it isn't a very good question. He should have asked if his proposed AA and future AA plans justify the higher ER's. They might and they might not.

OP might also consider keeping the CREF equity fund for most of his holdings but use one of the focused funds to correct any AA situation with the CREF fund he disagrees with. For example, if he would like a higher allocation of small cap, he could sell a bit of the CREF equity fund large cap and buy a bit of the focused small cap fund with that. Then there would only be a small percentage of his holdings subject to the higher AA.

It's hard to comment on OP's question without knowing what his AA plans are.
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Old 02-19-2013, 11:15 AM   #8
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I think you can do even better on fees. I just had Vanguard do a financial plan for me. They came up with 14 funds in the plan with an overall 0.14% expense ratio. I don't think a 0.49% fee is particularly cheap. The 1.0 to 1.3% fees certainly are not cheap. I think I'd shop a little an try to keep your fees as low as possible.

If you are going to choose between the two options you present, I'd stick with the CREF-Stock fund because it is chepear, and I don't see you gaining much with the multiple funds covering the same sectors as the single fund.

Most people can not shop their 401(k)s.... you have to live with what the company offers....
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Old 02-19-2013, 11:18 AM   #9
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Definitely stick with one fund in this case. It is diversified.
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Old 02-19-2013, 11:19 AM   #10
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By the way, if you have a strong desire to increase your allocation to, small cap stocks, a lower cost way of doing so would be to retain the bulk of your stock holdings in CREF-Stock fund and simply buy enough of the small cap stock fund to boost your allocation in that category. That way you get to take advantage of the lowest cost option in your 401k while also allowing yourself the freedom to tinker with your allocations. But, as youbet says, any tinkering should be based on a reasonable conviction that your allocations need adjustment, not just a vague hope that you can do better than a professionally managed fund.
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Old 02-19-2013, 11:20 AM   #11
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Most people can not shop their 401(k)s.... you have to live with what the company offers....
You are right. I misread. I still go with going cheaper with whatever options there are.
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Old 02-19-2013, 12:05 PM   #12
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The diversification of the single fund is perfectly fine.

If all the funds have done about the same, then you would have gained nothing by using multiple funds (unless you were able to do some significant rebalancing at some point), nor would you have been hurt by the higher fees. Your balance would be the same now either way.

Unless you feel strongly about a particular asset class or want to actively rebalance, I'd stick with the simplicity of the single low-cost fund.
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Old 02-19-2013, 12:24 PM   #13
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A no brainer to me, keep the CREF Stock Fund. It is well diversified, relatively cheap, performs well and makes things simple.
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Old 02-19-2013, 01:13 PM   #14
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CREF Stock Fund looks pretty well diversified. Unless it had not done well, you have an avid interest and insight, have a fair bit of money to make small adjustments in rebalancing worthwhile, and you follow all the markets as closely as those doing it as a living, for many people, it may be better to leave the work to the professionals.
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Old 02-19-2013, 05:06 PM   #15
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Thanks you all for your replies. I like the strategy of keeping the bulk of my investment in the one, low-fee fund, but "adjusting" the allocation by buying appropriate amounts of the individual, higher fee funds.

Before I can do that I must, as youbet stated, have a rationale for a specific allocation. Right now I don't know enough to know why I would want 40% versus 30% in Small Cap, so until I do more research I'll stay with CREF Stock.
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Old 02-19-2013, 05:48 PM   #16
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I just read something today, obvious to most here, but the concrete example was interesting concerning long term costs of funds a person owns. Wade Pfau said (in this months Money magazine) studying trends back to the 19th century, setting aside 16.6% (no fund expenses at all) of your income in a diversified portfolio of stocks and bonds for 30 years always succeeded for retirement planning. Having your funds saddled with a 1% fee, causes your safe saving rate to jump to over 22% for the same 30 years. I thought that info was very interesting anyways.
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Old 02-19-2013, 06:26 PM   #17
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In general, is it as simple as "if the performance difference is not greater than the fee difference, don't invest in the higher fee fund"?

For example, If fund B costs 1% more than fund A, but consistently outperforms fund A by 2%, then moving to fund B makes sense, right?

In my specific case, the above is true for only one fund (mid cap value) which is outperforming CREF-stock by .8% over the fee difference.
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Old 02-19-2013, 06:35 PM   #18
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Quote:
Originally Posted by psyprof View Post
In general, is it as simple as "if the performance difference is not greater than the fee difference, don't invest in the higher fee fund"?

For example, If fund B costs 1% more than fund A, but consistently outperforms fund A by 2%, then moving to fund B makes sense, right?

In my specific case, the above is true for only one fund (mid cap value) which is outperforming CREF-stock by .8% over the fee difference.
Nope, that is generally not that simple. Performance is really based on asset classes within a fund, so one has to be careful to compare apples-to-apples when comparing funds.

CREF-stock is probably less risky than a mid-cap value fund. CREF stock will be more diversified than a mid-cap value fund. So they are not directly comparable. You are comparing apples to oranges or even perhaps a bowl of various kinds of fruit to an orange.
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Old 02-19-2013, 06:40 PM   #19
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Quote:
Originally Posted by psyprof
In general, is it as simple as "if the performance difference is not greater than the fee difference, don't invest in the higher fee fund"?

For example, If fund B costs 1% more than fund A, but consistently outperforms fund A by 2%, then moving to fund B makes sense, right?

In my specific case, the above is true for only one fund (mid cap value) which is outperforming CREF-stock by .8% over the fee difference.
I was just giving you the staggering costs expense ratios can have on a fund. Now I would be doing you a big disservice in suggesting anything investment wise. FWIW- the article was implying getting into low cost index funds and ETFs under .10 expense ratio. Of course you have to deal the hand you are dealt with your funds.
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Old 02-19-2013, 06:50 PM   #20
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Quote:
Originally Posted by psyprof View Post
In general, is it as simple as "if the performance difference is not greater than the fee difference, don't invest in the higher fee fund"?

For example, If fund B costs 1% more than fund A, but consistently outperforms fund A by 2%, then moving to fund B makes sense, right?

In my specific case, the above is true for only one fund (mid cap value) which is outperforming CREF-stock by .8% over the fee difference.
Unless you have big money in your pot, worrying about small difference is hardly worth the effort. If you have $10000 in each fund, making a difference of 0.8% between funds as your biggest hit is only $80 a year. Rather than thinking about difference in performance of each asset class each and every day, guessing at predictions, agonizing about rebalancing and worrying about if you made the right change, working one day at McDonald's will make you that $80.
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