High return/High Expense ratio.......? Is it worth it?

[mannyahles]

When looking at the previous 10 years and the rate of return, I like to venture/gamble/invest in areas that have stood the test of time (10 years) I figure if it has performed well overall and decently thru 2008, I want to put a good chunk of my investment money in it!

So even if the fund has a high expense ratio eg .84% to 1.1% and you (hope) to get 6-10% rate of return, wouldn't that be better than paying .32% and getting a return of 3-4%?

I am just doing the math. They may charge you more but you get more in return.

Is this logical thinking? (I teach 2nd grade math! lol) (But I do have a math degree)

 

[mannyahles]

BTW, I love this forum and I like to click on all those GOOGLE ads. Now that is Easy money! lol

 

[73ss454]

Who is "they", and what are these investments?

 

[MasterBlaster]

When looking at the previous 10 years and the rate of return, I like to venture/gamble/invest in areas that have stood the test of time (10 years) I figure if it has performed well overall and decently thru 2008, I want to put a good chunk of my investment money in it!

So even if the fund has a high expense ratio eg .84% to 1.1% and you (hope) to get 6-10% rate of return, wouldn't that be better than paying .32% and getting a return of 3-4%?

I am just doing the math. They may charge you more but you get more in return.

Is this logical thinking? (I teach 2nd grade math! lol) (But I do have a math degree)

Are you comparing apples to apples ? Asset allocation is 90 percent of your performance. If you want to compare funds you need first to risk-normalize them. For the last 10 years funds in emerging markets and perhaps technology were steller. It's easy to pick winners looking back. So in the rear view mirror it seems that a fund with high fees in the right markets outperforms a fund in other markets with low fees.

regarding fees, In general there is no correlation between performance and fees paid. In general all fees do is subtract from your gain.

You need to read some of John Bogle's, or the Coffeehouse Investor's writings on this subject.

 

[travelover]

...........
You need to read some of John Bogle's, or the Coffeehouse Investor's writings on this subject.

Dang it Manny, you have the reading list. Now you need to seriously crack at least one of those books.

It isn't rocket science, but most of what you have heard on TV or read in magazines is bogus.

Read, read,read.

 

[kumquat]

One of those high MER funds will beat the market going forward. Trouble is, 99 won't. How do you pick "the one"?

They all have the disclaimer "past performance ..............."

 

[mannyahles]

Dang it Manny, you have the reading list. Now you need to seriously crack at least one of those books.

It isn't rocket science, but most of what you have heard on TV or read in magazines is bogus.

Read, read,read.

You know it. I will be a reading fool! I am 43 and want to retire when I am 63 so I have my work cut out for myself!

I already ordered the book Teach and Retire Rich and I will be hitting up the bookstore this weekend.

Thx again for your comments and suggestions,

Ciao!

 

[U1964]

...
I already ordered the book Teach and Retire Rich and I will be hitting up the bookstore this weekend. ....

Remember LBYM -> don't forget your library. "The Bogleheads' guide to investing" appears to be on the shelf in the Carlsbad library!

 

[mannyahles]

Ahhhh good idea. The Carlsbad library is about 1.5 miles from my house!

 

[Animorph]

Be sure to compare against a comparable index fund, like small-cap value for a SCV fund.

And although 10 years sounds like a long time, just being in large-cap value during the 2001 market dip and out of financials in 2008 would probably make a fund manager look like a genious. Not really as many random events as you'd like. Then you have to make sure the same manager has been in place the whole time, and will continue to be there for the next 10 while you're in it. Or that the corporate culture makes that less important.

Given the number of active funds, someone will beat the index handily over 10 years. Just by chance.

All that being said, I'm mostly in active funds, with modest expense ratios. We'll see in 10-20 years if it was worth it.

 

[chinaco]

When looking at the previous 10 years and the rate of return, I like to venture/gamble/invest in areas that have stood the test of time (10 years) I figure if it has performed well overall and decently thru 2008, I want to put a good chunk of my investment money in it!

...

Wow... you went from "hey is this insurance company scr3wing me" to... "I like/want to take risks".

3 Posts and your ready to be a hedge fund manager.

You are probably taking risks you don't know about.

Take some time to educate yourself. Better that you keep your money than give it to someone else.

 

[Gone4Good]

So even if the fund has a high expense ratio eg .84% to 1.1% and you (hope) to get 6-10% rate of return, wouldn't that be better than paying .32% and getting a return of 3-4%?

Yes, clearly paying 1.1% to earn 6-10% is better than paying 0.32% and earning 3-4%. And if it were that easy, everyone would be doing it and enjoying market beating returns.

But there is other math at work here, that is perhaps, a bit less obvious. You and I, along with every other investor on the planet, are the market. We can't collectively "beat the market" in the same way that everyone can't be "above average". So for every investor who "beats the market" someone else has to lag the market. If it were as easy as looking at a 10-year track record to pick a winning fund over the next 10-years, everyone would do it. But it's not possible for everyone to own market beating funds. At least half have to do worse than the market (actually more once investment costs are factored in).

So a question to ask yourself is, who are the fools that are deliberately picking bad funds, which allow you to pick good ones so easily? Alternatively, if you don't know who the fools are and why they're fools, how do you know you're not the fool picking bad funds?

 

[obgyn65]

Hello mannyahles - Why don't you invest in CDs and sleep better at night ? That's what I do.

So even if the fund has a high expense ratio eg .84% to 1.1% and you (hope) to get 6-10% rate of return, wouldn't that be better than paying .32% and getting a return of 3-4%?

 

[mannyahles]

Yes, clearly paying 1.1% to earn 6-10% is better than paying 0.32% and earning 3-4%. And if it were that easy, everyone would be doing it and enjoying market beating returns.

But there is other math at work here, that is perhaps, a bit less obvious. You and I, along with every other investor on the planet, are the market. We can't collectively "beat the market" in the same way that everyone can't be "above average". So for every investor who "beats the market" someone else has to lag the market. If it were as easy as looking at a 10-year track record to pick a winning fund over the next 10-years, everyone would do it. But it's not possible for everyone to own market beating funds. At least half have to do worse than the market (actually more once investment costs are factored in).

So a question to ask yourself is, who are the fools that are deliberately picking bad funds, which allow you to pick good ones so easily? Alternatively, if you don't know who the fools are and why they're fools, how do you know you're not the fool picking bad funds?

Very well said. I know at this time my ER is way to high on my advised Meeder account thru Nationwide (457b). I will be looking into some Vangard funds witha lower ER.

Its like gambling on sports. Vegas picks a spread knowing that 1/2 of the people will win, and the other 1/2 will lose. They make their money on the juice like an FA makes on expenses. I believe its ALL a conspiracy!

 

[Danmar]

Problem is the high MER's afe much more likely than the outperformance of the funds. Get smart Manny. Not too late

 

[DblDoc]

Hello mannyahles - Why don't you invest in CDs and sleep better at night ? That's what I do.

Because that has risks as well - the earlier you want to retire the greater the risk of inflation destroying your purchasing power over the long term. It can work if you have enough money (ie much < 4% withdrawal rate). TIPS may be an alternative strategy but again I would not want to bet my entire retirement nest egg on it.

DD

 

[Meadbh]

Here are a couple of math concepts you should consider, Manny:

1. Correlation. Or lack thereof. There is no correlation between MER and performance.

2. Variation. High risk strategies are volatile. Extreme highs followed by extreme lows, and back again. If you hit retirement just as one of those lows is coming along, the sequence of returns can irreparably damage your portfolio. Volatility is especially to be avoided during the decumulation phase.

3. Regression towards the mean. Outstanding performance is often a special cause variation and is unlikely to be sustainable.

4. The jury is out on whether active management versus indexing delivers better long term returns. Given the lower MERs associated with indexing, and the equation

Real return = Total return - MER

the answer should be obvious.

Class dismissed!

 

[Buck Rogers]

Past performance is no guarantee of future success.

And

It's hard to make predictions. Especially about the future.

 

[SVHoper]

What you said is perfectly logical.

As others have said the key point is that it is not a simple matter to pick the high performing manager for the future. Return is uncertain... costs are certain, that is why it is recommended to ensure you minimize costs.

My 2c worth of advice is to really understand asset allocation and rebalancing. Understand the morningstar style box. Know what SC, SCV, LC, ILB, EM etc etc mean and determine your asset allocation.
http://www.early-retirement.org/forums/f28/asset-allocation-tutorial-31324.html is a pretty good intro.

Once I determined asset allocation, I found that working out which funds to employ was so much easier - if Vanguard have a fund that covers that allocation it is highly likely it will be the lowest cost and return satisfying market performance eg 2010 SC 20%+ and REIT ~30%.

Out of about 14 funds, I have chosen 12 passive index funds and 2 actively managed funds and even for those I split that allocation 50/50 active and index.

[Many others are happy with 4 or less funds.]

So, in summary what you say is perfectly logical... but you are missing the bit about the odds of picking the successful active manager (may be <<1). Vanguard site is down for maintenance, but here is a decent summary of difficulty in beating the market.

The Online Asset Allocator
Another link you may find interesting... what was hot last year or decade is not likely to be hot next year... or decade
http://www.callan.com/research/periodic/