

The Truth About Mutual Funds: Fees vs. Returns - virincognito
http://www.vuru.co/blog/2012/01/18/the-truth-about-equity-mutual-funds-fees-vs-returns/

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encoderer
As a layman who has done a lot of research, I have 3 pieces of advice for
people investing their 401k/IRA:

1) No Load Index Funds.

2) No Load Index Funds.

3) No Load Index Funds.

Seriously people. If your fund selection is so poor in your company's 401k
that they don't have a single No Load Index Fund, lobby your HR to get one
added, and put your money in the lowest load Index Fund, and put only the very
minimum in there to get your company match, and put the rest in an IRA at a
company that gives you the option of a No Load Index Fund.

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anonymousDan
Can you explain what you mean by a No Load Index Fund? Can you give an example
or two? Thanks.

~~~
encoderer
A type of fee commonly levied on mutual fund investors is called "Load." It's
a fee you pay either when you buy shares of the fund (front load), or when you
sell them (back load). Load is evil and should be avoided.

Index Funds are mutual funds that are not managed. That is, there's no manager
and team of assistants that spend time curating the assets in the fund. These
peoples salaries and their trading activities cost money and that comes out of
your gains.

Index funds are simple: Take a snapshot of the market, say the NASDAQ or S&P
500. Determine the total pie -- add up the market value of all the companies
in the index. Suppose AAPL is 15% of the total value, MSFT is 10%, etc. Take
all the assets in the fund and spend 15% on AAPL stock, 10% on MSFT stock,
etc. Rebalance periodically as needed.

Index funds have historically out-performed most managed funds. There are some
winners. Some managed funds that have huge market-beating gains. But trying to
pick these big winners is not a sound investment strategy.

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ch00
Comparing the returns of a basket of all mutual funds to the returns of one
large-cap stock index over a highly volatile period isn't very meaningful. The
mutual funds weren't even 100% equities, so you're partially comparing the
returns of entirely different asset classes.

As the article mentions, it's impossible to invest in the total mutual fund
market. There is no index fund of mutual funds, nor is there any need when you
can diversify across the entire market through existing index funds.

See also The Arithmetic of Active Management:
<http://www.stanford.edu/~wfsharpe/art/active/active.htm>

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pge
If you're interested in a very good exploration of this topic(in the broader
context of managing a large endowment), David Swensen's book Pioneering
Portfolio Management is worth a read. Swensen manages Yale's very successful
endowment and has been a thought leader in investment management. He is also
an outspoken critic of actively managed mutual funds and supports his argument
with solid data.

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RockyMcNuts
he also has a book for individual investors, 'Unconventional Success', which
is very good, and also skewers active fund managers.

the opportunities in the context of an endowment are somewhat different from
those facing individual investors, ie alternative investments are less
practical, tax and time horizon considerations are different.

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tosseraccount
"We chose to look at this figure instead of the compounded return because
individual investors often move from one fund to another."

Comparing returns over 10 years without re-investing dividends is just not
right.

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ldayley
Hedge funds are in the same situation, and their fees are even higher - fees
of 2% of total Assets Under Management PLUS 20% of any gains are common. For
all of that, they have experienced challenges beating indexes as well (down
6.4% for 2011, as measured by the Dow Jones Credit Suisse All Hedge Index -
according to the article linked below).

[http://www.forbes.com/sites/greggfisher/2012/01/23/chasing-t...](http://www.forbes.com/sites/greggfisher/2012/01/23/chasing-
the-mirage-of-hedge-fund-returns/)

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prodigal_erik
Hedge funds' original purpose was to stay negatively correlated with the
market, not to beat it consistently. Each is hard enough that doing both
probably isn't possible, and it seems to me they aren't keeping their clients'
expectations realistic.

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RockyMcNuts
If you invest for n years and the fee is i%, at the end of the period you will
have paid n x i% of the average balance.

or, compared to the final amount you would have had, the amount foregone with
compounding is 1 - (1- i) ^ n.

a big number. for instance, after 30 years, for every dollar you would have
had without fees, at 1% fees you would have 76 cents.

(for sufficiently low i, (1- n*i) would be a close approximation, but the fee
i is usually not low enough LOL)

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fraserharris
It is surprising that mutual fund returns, after fees, were better than the
S&P.

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rdtsc
It is hard to tell unless all the funds in question only picked S&P tracked
instruments. It could be for example, that some funds invested heavily
internationally so international market in general delivered better returns
than S&P tracked market?

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mjwalshe
That is why I prefer IT's with TERs much less than the ones charged by open
ended UT.

