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How much do fund fees/expense ratios matter? March newsletter

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  • #16





    This is the problem with this line of thinking.  There is no way to figure out whether an actively managed fund is “quality” or not.  Funds outperform benchmarks until they don’t.  The issue with active funds is not the fees, it’s the underperformance. 
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    I guess it depends on your definition of quality. That doesn’t mean we think we can predict results but it does mean that we vet managers and the characteristics of the fund – including fees and turnover. Not to attempt to outperform but to avoid long term under-performance. How many schedule D’s do you think I’ve seen in my life that have consistently under-performed over the long term? I can promise you the reason was not high fees.
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    Sure, there are worse mistakes you can make than paying high fees, but paying high fees is a mistake that is easy to identify and correct.

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    • #17
      Sure, there are worse mistakes you can make than paying high fees, but paying high fees is a mistake that is easy to identify and correct.
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      Exactly, I don't disagree with that statement in the least.

      Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #18





        To me, the whole reason to actively invest is to outperform whatever index you’re looking at. If your goal is to avoid long term under-performance then that defeats the purpose of active investing. Besides, it’s hard to do many things long term with actively traded funds because a large majority don’t survive long term. 
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        I knew this would be fun.
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        It isn't fun if everyone agrees all the time!  

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        • #19










          It’s not really a matter for debate.  You should seek the highest risk-adjusted return possible for a given asset class.  If an actively managed fund can deliver alpha then you should be willing to pay fees in an amount less than alpha.  Can you or anyone else determine whether a manager is delivering alpha?  Probably not.  You are left then with passive index funds.  The only thing differentiating the same index funds is the amount of fees.  You should then choose the funds with the lowest fees according to your asset allocation.  The end.
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          I’m actually kinda shocked any financial advisor on this site would suggest otherwise.
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          I’m not looking for alpha. I’m looking to keep clients from under-performing what is possible to achieve in the market. I’m just disputing the gospel that the only way to do that is with passive funds. As I said in the article (which I’m sure you read), I’m agnostic about which way is better. It really doesn’t matter.
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          sure, its not the only way.  you just have to pick the right actively managed funds.  easier said then done considering how many underperform the market in the long term.

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          • #20
            Yeah.  Not feeling this at all.  If you pick the active fund that has higher fees than the passive fund, then you break even if and only if the active fund beats the passive fund by the delta in the fees.  Since it's impossible to know that you're picking the right fund--you could well pick one that underperforms the market, to say nothing of beating the market by enough to cover the fee delta--and, in fact, the historical information indicates that you are MORE LIKELY to pick the wrong fund than the right fund, this is a mathematically inferior way to go.

            The only way to change the math is to change the assumption that it's impossible to know that you're picking the right fund.  And, to that, I'd say that I hope you have a good crystal ball.

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            • #21

              Yeah.  Not feeling this at all.  If you pick the active fund that has higher fees than the passive fund, then you break even if and only if the active fund beats the passive fund by the delta in the fees.  Since it’s impossible to know that you’re picking the right fund–you could well pick one that underperforms the market, to say nothing of beating the market by enough to cover the fee delta–and, in fact, the historical information indicates that you are MORE LIKELY to pick the wrong fund than the right fund, this is a mathematically inferior way to go.

              The only way to change the math is to change the assumption that it’s impossible to know that you’re picking the right fund.  And, to that, I’d say that I hope you have a good crystal ball.

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              Please, prove what I wrote is wrong (you have to take the whole article, not pick out pieces that don't sit well with you). All you guys and gals are doing is making presumptions and spouting hypotheses. I don't think you are listening when I say I am trying to avoid under-performing, not outperform. If you can do that, you've won the game. 

              Gotta go offline for awhile. 

              Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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              • #22
                I agree that asset allocation is very important.

                And I further agree that quality funds are important.

                Fund fees are also important, but only to a certain point.  If you invest in quality funds with fees less than 30 basis points, then you are probably in reasonably good shape.  However, there are mutual funds out there with over 100 basis points in annual fees, and even funds with over 200 basis points in fees.  Those funds are not ok.  They could cost a physician $300,000 or more over a 30 year retirement funding period.  It is easy to do the math.

                We try to keep our all in fees for our practice 401k below 50 basis points, and only a small portion of that is the fund fees themselves (roughly 10 basis points).  The rest is divided between our record keeper and our third party administrator.  Achieving these low fees was impossible when we had a small plan, but is now achievable with a medium sized plan.

                So yes, asset allocation and quality funds are where one should start.  However, one should also pay attention to fund fees.  I would not change 401k providers to chase small differences in fund fees, but excessive fund fees are a big problem that will interfere with long term success.

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                • #23







                  Yeah.  Not feeling this at all.  If you pick the active fund that has higher fees than the passive fund, then you break even if and only if the active fund beats the passive fund by the delta in the fees.  Since it’s impossible to know that you’re picking the right fund–you could well pick one that underperforms the market, to say nothing of beating the market by enough to cover the fee delta–and, in fact, the historical information indicates that you are MORE LIKELY to pick the wrong fund than the right fund, this is a mathematically inferior way to go.

                  The only way to change the math is to change the assumption that it’s impossible to know that you’re picking the right fund.  And, to that, I’d say that I hope you have a good crystal ball.
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                  Please, prove what I wrote is wrong (you have to take the whole article, not pick out pieces that don’t sit well with you). All you guys and gals are doing is making presumptions and spouting hypotheses. I don’t think you are listening when I say I am trying to avoid under-performing, not outperform. If you can do that, you’ve won the game.

                  Gotta go offline for awhile.
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                  I think the foundation that you're starting off with in regards to that you're trying not to under-perform is way off base and where you're losing everybody. If you're not trying to outperform an index, that means the best you can do is to match it. If an actively managed fund matches the return of a passive fund, I would almost guarantee the passive fund will come out ahead secondary to fees. If you want to win the game, the easiest way to victory would be to select a low fee index fund instead of picking a higher fee active fund and just trying to tie.

                  Comment


                  • #24







                    Yeah.  Not feeling this at all.  If you pick the active fund that has higher fees than the passive fund, then you break even if and only if the active fund beats the passive fund by the delta in the fees.  Since it’s impossible to know that you’re picking the right fund–you could well pick one that underperforms the market, to say nothing of beating the market by enough to cover the fee delta–and, in fact, the historical information indicates that you are MORE LIKELY to pick the wrong fund than the right fund, this is a mathematically inferior way to go.

                    The only way to change the math is to change the assumption that it’s impossible to know that you’re picking the right fund.  And, to that, I’d say that I hope you have a good crystal ball.
                    Click to expand…


                    Please, prove what I wrote is wrong (you have to take the whole article, not pick out pieces that don’t sit well with you). All you guys and gals are doing is making presumptions and spouting hypotheses. I don’t think you are listening when I say I am trying to avoid under-performing, not outperform. If you can do that, you’ve won the game.

                    Gotta go offline for awhile.
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                    "Avoids under-performing" and "outperform" are different degrees of the same continuum.  If you have a fund that "avoids under-performing," i.e., it delivers precisely market returns, then that fund is inferior to a passive fund with lower fees.  And that active fund remains inferior to the passive fund unless and until it "outperforms" the market by more than the difference between its fees and the fees of the passive fund that exactly follows the market.

                    You've assumed away the biggest problem with your argument (both here and in the materials you put up).  Of course fees don't make a difference if you assume that the active funds perform well enough to make up for their higher fees.  But that's the whole point:  statistically, active funds don't perform well enough to cover that delta, so why on earth should anyone that is following the math take that plunge?

                    Comment


                    • #25
                      I think Johanna’s point was that the returns of her firm’s active fund portfolios matched their passive fund portfolio. It is certainly possible to match and beat market returns with actively managed funds, even despite the higher expenses. From the admittedly modest amount I have read though, more times than not, a passively managed portfolio will beat an actively managed portfolio over the long run (30-40 years)

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                      • #26




                        I think Johanna’s point was that the returns of her firm’s active fund portfolios matched their passive fund portfolio. It is certainly possible to match and beat market returns with actively managed funds, even despite the higher expenses. From the admittedly modest amount I have read though, more times than not, a passively managed portfolio will beat an actively managed portfolio over the long run (30-40 years)
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                        Right.  Which is the point. No doubt that actively managed funds can and do beat the market even accounting for fees.  Great!  But (a) any individual has a meaningful chance of failing to pick the fund that does that; (b) the funds that manage to do that change over time and are as likely to be hitting on luck as much as any kind of universal secret of investing; and (c) the math is against any particular individual falling on the right side of both of these lines, and so the math is against going with active funds.

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                        • #27
                          I have to agree with Tabaxus.  Sure, a portfolio of higher-fee actively managed funds can outperform a lower-cost portfolio.  And yes, taxes, diversification and asset allocation should have higher priority.  I would however, be hesitant to conclude that fees are irrelevant.  Multiple studies on the topic would say otherwise.  Morningstar produced a well done study in 2016 that shows lower fees are a predictor of future returns: http://news.morningstar.com/articlenet/article.aspx?id=752485

                          I would also be curious if the two active and passive portfolios presented had equal asset class and style weightings or how you controlled for that in the analysis.

                          That said, if you are trying to argue that active management can have some place in a portfolio, I would agree.  I will use active management to some extent in asset classes where active managers have historically outperformed the passive equivalent or in asset classes where the passive benchmark is difficult to replicate.

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                          • #28



                            I will use active management to some extent in asset classes where active managers have historically outperformed the passive equivalent



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                            which asset classes are these?

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                            • #29
                              I am willing to pay active management if it will prevent me from a downfall. 40% drop sucks and that’s when people lose their minds and make awful decisions. I am not willing to pay for advice that will give me unrealistic projections that the market will give me 5-8% return in the long run. These are the same people who does not know or care to analyze financial statements of companies inS&p500.

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