Posts Tagged "stocks"

High Fees Tied to Mutual Fund Complexity

When David Marotta is investing his clients’ money in mutual funds, he scrutinizes the fees.

SP500 Index FundsTo demonstrate why fees are so important, Marotta charted the fees and 10-year returns for dozens of index funds in the Standard & Poor’s 500 family. Since these funds all track the same index and their performance is roughly the same, the fees will largely determine how much of the return the investor keeps and how much goes to the mutual fund company.

“The larger the fee the less that it performs. It’s kind of a straight line,said the Charlottesville, Virginia investment manager. “Anytime we’re picking a fund” for a client, “we’re trying to find the lowest-cost fund that we can find in that sector.”

The fees for the S&P 500 index funds he analyzed using Morningstar data ranged from one-tenth of a percent to 2.5 percent of the invested assets.

The issue of fees versus performance is more complicated for actively managed investments, which sometimes have strong returns that justify paying a higher fee. But in any investment, the true measure of how it’s doing is the after-fee return.

However, deciphering mutual fund fee disclosures can be extremely difficult for do-it-yourself 401(k) and IRA investors – and that is by design.

An analysis of S&P 500 index funds identified numerous narrative techniques in mutual fund documents that confuse investors. The researchers – from the University of Washington, MIT, and The Wharton School – evaluated each fund’s disclosures and showed that funds with more complex explanations of their investment holdings and fees also have higher fees. The researchers call this “strategic obfuscation.”

The study, which covered the period from 1994 through 2017, illustrated this complexity with two firms’ descriptions of their S&P 500 index funds. Schwab’s one-sentence summary gets right to the point: “The fund’s goal is to track the total return of the S&P 500 index.” This fund’s annual fee is 0.02 percent of the assets.

Deutsche Bank’s disclosure is more complicated for a few different reasons. First, the summary is three paragraphs and starts this way: “The fund seeks to provide investment results that, before expenses, correspond to the total return of common stocks…” …Learn More

How Does Your Wealth Compare?

Depressing or eye-opening?

An online tool tells you where you stand financially by stacking up your net worth against other Americans.

The calculator compares a family’s net worth – financial and other assets minus debts – with all other U.S. families. Homeowners can choose to include the value of their home equity in their total net worth – or not.

Older people have had more time to accumulate wealth, so the rankings are based on the age of the household’s primary wage earner. The comparison is made with 2016 data from the Federal Reserve Board’s triennial Survey of Consumer Finances, which is the gold standard for personal financial data.

Since family – not individual – data are being compared, people who live alone are at a disadvantage. They will be measured against households with more than one person working and accumulating assets.

The calculator is on the DQYDJ financial blog written by a computer programmer and a financial professional. The validity of the results was confirmed by an economist formerly with the Center for Retirement Research, which sponsors this blog.

It might be fun to find out how you’re doing. But use this online tool at your own risk! …Learn More

Percent signs on a chalkboard

How Long Will Retirement Savings Last?

It might be the most consequential issue baby boomers will deal with when they retire: did I save enough?

Vanguard’s free online calculator will estimate that for you, using the same sophisticated technique financial advisers charge hundreds of dollars to provide.

The user-friendly calculator uses 100,000 of what are called Monte Carlo simulations of potential future returns to the financial markets to arrive at the probability that a household’s invested savings will last through the end of retirement. To get to this number, older workers enter their information into the calculator – 401(k) account balance, asset allocation, estimated years in retirement, and annual withdrawals – by moving around a sliding scale for each input.

The financial industry recommends aiming for a probability in the 80 percent range – 95 percent is overdoing it. In the end, however, your comfort level is a personal decision.

An important purpose of the calculator is to demonstrate how changes in the inputs can hurt one’s long-term retirement prospects – or improve them. One obvious example is increasing the annual withdrawal amount, which lowers the probability the money will last. To increase your chances, try a later retirement date.

The calculator is a lot of fun, but it has some limitations.

First, it’s no substitute for a detailed pre-retirement financial review. The other issues are primarily mathematical, and they boil down to the difficulty of predicting the future.

The calculator assumes, for simplicity, that a retiree withdraws the same dollar amount from savings every year to supplement Social Security and any pension income. But Anthony Webb, an economist at the New School for Social Research in New York, said this ignores the most important thing retirees should do to preserve their money: adjust the withdrawals every year, depending on how their investments have performed.

“If you encounter icebergs (bear markets), you should cut your spending” and withdrawals, he said. …Learn More