
Study finds that low fees are best indicator of mutual fund performance - ryanwaggoner
http://www.nytimes.com/2010/08/16/opinion/16mon2.html?_r=1&src=twr
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bolu
Makes sense, though it's probably a correlation to the root source of
outperformance, which is being an index fund. Cheaper funds tend to be index
funds, index funds tend to outperform, thus cheaper funds end up outperforming
more expensive (usually more actively managed) funds. One of the seminal
studies on this is
[http://www.firstquadrant.com/downloads/How_Well_Have_Taxable...](http://www.firstquadrant.com/downloads/How_Well_Have_Taxable.pdf)

What's more, the more expensive (again usually actively managed) funds tend to
have high turnover, and turnover implies a huge tax penalty for taxable
investors in taxable accounts. So if anything, the winnings of lower-fee index
funds are understated, as turnover-generated tax hits are not disclosed well.

I agree with the author completely - hopefully more disclosure, legislated,
would entice more people to shop for lower-fee funds.

(Full disclosure, I run a startup that's based on helping people do index
investing, so I might be biased ;p)

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davidw
So what do you think of ETF's? From what little I've read, that seems like a
pretty good way of doing index investing.

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bolu
They're good - gotta watch out for your effective expense ratio, which is the
amount of commission you pay for the trade (depends on your brokerage house
and the ETF) divided by the years you plan to own it, added to the ETF's own
existing expense ratio. So net net, buy in larger chunks, or find one of the
no-commission-ETF houses.

Also, and it sounds like you are, you need to be familiar / comfortable with
limit orders or market orders. That sometimes can scare folks who are used to
not-very-time-sensitive daily-priced mutual funds.

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davidw
Actually I don't know much at all about investing. I know what a stop loss
order is, but I don't think I'd know how to use one effectively.

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bolu
You probably won't need it, unless you're doing something significantly more
complex than the fundamental buy-and-hold index investing strategy.

I'd just use market orders all the time except I'm a little freaked out about
momentary (on the order of minutes) market freak-outs as happened a couple
months ago. Limit orders priced at the current price (or 1 cent higher) is
pretty much just my way of enforcing a sane market order.

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patio11
Bogleheads have known this for thirty years now. Buy index funds, people.
Defaulting to Fidelity & etc 2 percent fee funds, like many do in their 401ks,
will cost you literally millions over your lifetime.

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bolu
Sigh... so true. I only wish the economics were different. If, like Fidelity,
you extract a ton in fees it allows you to swamp the airwaves with marketing
dollars. And the folks who just keep their heads down and do their jobs, well,
don't have as much money to run ads. And in this market, unfortunately,
because few people understand it deeply ad dollars can move the needle.
Unfortunate, to say the least.

This is not even considering the who commissioned-advisor problem.

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patio11
On the Predictably Irrational blog there was an example of how clients
recommended Fidelity and Vanguard evenly picked Fidelity on the basis of 25k
bonus airline miles (cash value $250) so that they could pay $2~20k extra a
year in management fees. I wanted to cry... And figure out how to offer
airline miles.

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bolu
It's because the fees charged don't appear as a line item on your statement.
It's probably the only thing most American families spend more than a $1000 a
year on (I did the math), for which they get no documentation... not even a
receipt.

Can you imagine how different the world would be (and how much less Fidelity
would make) if you had to pay fees out of pocket? A single piece of simple
legislation that disallows silently deducting fees from your assets would be
all it takes.

My co-founder and I sometimes sit at dinner thinking that if we do nothing
else for the world but make fees (both expense ratio and more subtle ones like
turnover-induced tax hit) more tangible, then we'll have succeeded.

~~~
InclinedPlane
Good point.

However, there are two even bigger line items that American families spend
more than $1000 a year on without any documentation or receipt.

Payroll taxes: the amount you see on your paystubs for social security and
medicare taxes is actually only _half_ the amount that you pay. The other half
is hidden from your eyes under the guise of an "employer contribution" which
is a bit of accounting terminology which roughly translates to: straight up
bullshit. Employers have no choice but to pay the taxes, on their side it is a
cost of maintaining you as an employee, it is thus logically a part of your
earnings that you never see on any documentation (imagine if all of your taxes
were hidden from you similarly). Self-employed workers have to pay the full
15.3%.

And, medical insurance dues. Again employers hide about 2/3 of medical
insurance costs from employees by pretending that an "employer contribution"
to employee health insurance payments isn't a part of the employee's salary.
Clearly it is and it's shameful that people don't appreciate how much they are
truly paying for their health insurance plans. The reason this practice exists
is due to wage controls put in place during WWII, in order for companies to
attract good employees they had to figure out ways of offering compensation
that didn't appear on IRS documentation, so employer paid health insurance
became popular.

An American family with insurance through their employer earning the median US
income (~50k) pays $3800 in payroll taxes and about $2000 in health insurance
contributions every year ($178k over a 30 year career) without ever seeing a
line item, a summary, or any scrap of documentation.

