Expenses

[KM]

I know you should look for funds with low expenses. Am I figuring this out correctly? Assume you had 10,000 to invest:

FUND A has expense of 1.5% and returned 11% - you would have $11,100 before expenses and $10,933.50 after expenses

FUND B has expense of 1.0% and returned 10.8% - you would have $11,080 before expenses and $10,969.20 after expenses

FUND C with expense of .10% and returned 9.5% - you would have $10,950 before expenses and $10,939.05 after expenses


So, ultimately, the return - expense is what you should really be looking at. If FUND B consistently (which I think is the key here?) returned 10.8, it would be the best choice, although not the lowest expense?

 

[d]

returns are figured after the expenses have been deducted.

 

[Brat]

In most cases the expenses are taken out before the return calculation (exception are transaction fees, loads, 12(b)1 fees).

The import of expenses is that the fund manager must earn the difference in investments to come out ahead. For example, fund C has an expense of 0.1% and fund A 1.5%. The manager of fund A must CONSISTENTLY earn more than 1.4% than the manager of fund C.

Historically managers have not been able to beat indexes consistently. Index funds have very low expenses.

 

[KM]

So the published return is after the expense. That's what I wasn't sure about. I pretty much stay with index funds, but I have some other choices in our 401ks and the non-index returns seem to always be much better. Before I spent too much time going through the stuff, I wanted to be sure I knew what I was looking at. Thanks!

 

[Rich_by_the_Bay]

What D and Brat said, but caveat emptor. The way expenses are presented can be deceptive. Returns net of expenses is what you want to use to compare funds, and these are usually embedded in the total return numbers.

 

[donheff]

So the published return is after the expense. That's what I wasn't sure about. I pretty much stay with index funds, but I have some other choices in our 401ks and the non-index returns seem to always be much better. Before I spent too much time going through the stuff, I wanted to be sure I knew what I was looking at. Thanks!

There may be a bit of survivor bias at play here. The funds yo see are the good ones that have survived a few years -- but they may not survive this year, or next. I also have a number of managed funds (load funds I got into before I knew better). The funds the advisor suggested were always highly rated and generally performed fairly well. But I have been closely monitoring them since joining this group. I have concluded that, overall, I would do better with indexes or a simple target retirement fund. This year, for example, a high flying Calamos fund with more than $100K did very poorly. It dragged my overall averages below what I would have gotten with a TR. One of the other managed funds also did poorly. I have decided to pull all of these funds out and move to Vanguard. I still have some losses I accrued in 2001-2002 that I can use to offset most of the gains so the move will be fairly painless.

 

[cute fuzzy bunny]

I've yet to see an expensive fun outdo its index over 10+ years, aside from Bill Millers current fund and Peter Lynch's Magellan. Lynch ran out of luck. So will Miller.

If you're paying over .50% (or less than half that for common US funds) you're going to be financially sorry sooner or later.