Great Tool for Investors: Mutual Fund Expense Analyzer

Want to find out exactly what your mutual funds will cost you in fees?

Here's a great little tool from the Financial Industry Regulatory Authority (FINRA) to help you do that:

http://apps.finra.org/investor_Information/ea/1/mfetf.aspx

It's a calculator where you select the mutual fund you own from an extensive list (you even enter what share class you own ... A shares, B shares, etc.). Then enter the amount you have invested, the expected annual return, and the holding period (the number of years you plan to own shares).

The calculator then shows you what your investment will grow to and how much you will pay in fees over the timeframe selected.

You can also compare funds. Try entering funds that your investment advisor has bought for you or you selected for your 401k/403b plan. Then compare that to the equivalent Vanguard index fund or ETF. The difference in fees can be eye-opening.

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 

The Miracle of Compounding Interest and the Disaster of Compounding Costs

Compound Interest.

It’s been called the Eight Wonder of the World. Albert Einstein reportedly deemed it the greatest mathematical concept of our time.

Here’s how it works.

You take some money, say $1000, and put it into an account that earns interest. If you have an annual interest rate of 8%, after the first year you’ve earned $80. This gives you a total of $1080.

The second year, you get 8% interest again. Only this time, you earn 8% on $1080 (your original $1000, plus the $80 in interest you earned the first year). That means you’ll earn $86.40 in interest for year two, bringing your total to $1,166.40.

Do this for 30 years and without adding another penny to your savings you end up with over $10,000. Do it for 50 years and you’re close to $47,000.

If you add money to your original $1000 on a regular basis, then things really get interesting. Adding just $1000 a year (using the same 8% annual return above) will bring your 30 year total to over $132,000 and over $660,000 if you don’t touch it for 50 years.

While many investors are aware of the concept and benefits of compound interest, few give thought to the sinister forces of compounding costs.

An excellent article from the Consumerist shows how costs can add up over time . . .

"A 2006 study by Congress found that increasing fees by 1 percentage point results in you having 17% less money money when you retire.

In their example, put $20,000 in a 401(k) for 20 years and you end up with $58,000 if the fees are 1.5%. But if they were .5%, you would have $70,500. That's a lot of money. Increase the time to 35 years and what would be $220,000 drops to $163,000.

If you invest $1,000 at age 20 with an 8% return and 2.5% expense ratio, and just leave it there like that until you're 85, you will come out with $35,250, while your fund manager rakes in a cool $126,432."

That’s right, you’d be putting about 3.5 times as much money in your fund mangers retirement account than your own!

Two questions for you to ponder:
1. How are those seemingly small percentages you’re paying your 401(k) plan administrator and/or active mutual fund manager going to impact your ability to retire and the lifestyle you lead when you retire?
2. Are you doing more to build your nest egg or your money manager’s nest egg?

You can read the entire article from the Consumerist here.

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 

The Huge Gap Between Fund Returns and Shareholder Returns

They’re hard to ignore.

Those eye-popping returns featured in the ads for the mutual fund industry are very attractive. Why try to match the market when it looks like you can smash the market by investing in the right mutual fund?

Unfortunately, things are not always as they appear.

At a talk to the Financial Industry Regulatory Authority, John Bogle, the founder of Vanguard, shared some startling data.

Returns for the S&P500 from 1980 – 2005: 12.3%

Returns of the average fund from 1980 – 2005: 10%

And how well did investors do in that time period? No one knows for sure, but it appears they did much worse than 10%.

As an example of how bad investors might have fared in that time period, Bogle looked at the returns of the 200 funds with the largest cash inflows from 1996 – 2005. Those funds reported average returns of 8.9% for the period. The dollar-weighted returns (the returns shareholders actually earned) were an abysmal 2.4% - just 25% of what the funds themselves returned.

Of course the fund industry will say that it’s the investors fault for not staying fully invested during that time. Bogle has a different view however. He sites 3 main reasons that the mutual fund industry plays a big role in the dismal returns actually earned by investors.

1. “It was we in the fund industry who created those new funds that were to create such havoc for investors. As the market soared ever higher, we introduced those 494 brand new “New Economy” funds. Only a precious few of the major fund marketers had the courage to stand firm against the market madness, and forbear from creating and offering such funds.

2. When we had funds whose performance turned “hot,” we marketed them aggressively. Our public relations departments were willing co-conspirators with the press in establishing interviews with our “star” portfolio managers, many of whom, inevitably, turned out to be comets.

3. The higher a fund’s performance soared, the more we advertised our returns. Example: In March 2000, the month the market hit its high, there were 44 equity funds that advertised their performance in MONEY magazine. The average advertised annual return was +86 percent. Imagine! (During the next three years, these funds were to plummet by 39 percent.) Unsurprisingly, after the fall, in the October 2002 issue ofMONEY there were only four funds that did so.”

We have two lessons here:

1. Invest for the long term. Market timing does not work.
2. The “eye-popping” returns featured in the ads for actively managed funds are very misleading. The overwhelming evidence out there indicates that investors would be much better off investing in low cost, passively managed index funds.

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
•