Mutual Fund Fees and Expenses
OUCH! HOW TO SPEND $3 MILLION FOOLISHLY!
The US Securities and Exchange Commission has posted valuable information about mutual fund fees. Mutual funds typically charge more fees than cows have teats. If you are not careful you will be milked before, after and while you turn around.
The SEC site offers a free Mutual Fund Cost Calculator. This calculator can be used to find out how much the fees will cost over a specific holding period.
Investors are often fooled into investing in "no-load" funds because these funds do not charge sales fees or perhaps redemption fees. Investors often ignore a long list of other fees because they seem small. One should note that fees are expressed as a percentage of total assets and assessed regularly. If you own funds, you should use the calculator to see just how much you are paying for services--you may be surprised.
I have run the calculations on two funds that do not have sales fees or redemption fees. To keep the examples simple, I have aggregated their assortment of fees into single numbers.
If you and your spouse have reached the age of 50, it is probable that at least one of you will live to be over 90, therefore I have used 40 years as the holding period. Of course the holding period may be much longer if the funds are held in retirement accounts with children or grandchildren as the beneficiaries (a good estate plan will keep retirement funds compounding tax free for as long as possible).
In each case, I have assumed the fund will earn 11%. Eleven percent results in an under-statement of costs because the average stock does better than 11%. Smaller companies have returned 14% compounded on average for the past 50 years. Using 14% would make the numbers so large that you might not believe the results; I stuck with 11% in both examples.
Example one is a low cost fund. It charges total fees equal to one half of one percent of assets. A $100,000 investment in this fund would result in total fees paid over 40 years of $277,322 and the foregone compounded earnings would be $903,612. The total drag on the account would be $1,180,934. The value of the account after 40 years would be $5,319,151.
Example two is a high cost fund. It charges total fees of 1.75% of assets. A $100,000 investment in this fund would result in total fess paid over 40 years of $666,531 and the foregone compounded earnings would be $2,625,650. The total drag on the account would be $3,292,181.62. The value of the account after 40 years would be $3,207,905.11!
Can you see why I avoid mutual funds? In the second example, the investor puts-up 100% of the money and gets half of the money produced by the investments.
Please note that insurance companies and mutual fund companies sell many products that include sales charges and additional fees which were not included in these examples. Insurance and mutual fund representatives are not bad people. Neither is the Fuller Brush Representative. Fuller Brush makes good products but those who are willing to buy at department or discount stores can save a lot. Buying a high fee mutual fund is like buying a kitchen tool from a Fuller Brush Rep. and then paying an annual maintenance fee, a replacement contract fee and an annual fee to pay for regular mail solicitations.
Fifteen stocks in diverse industries typically gives one 97% to 99% of the diversification benefit of a mutual fund (besides, many funds do not buy what they say they buy or are poorly diversified). The benefits of further diversification are minor. Owning more than 25 stocks can be cumbersome. Owning individual stocks can dramatically reduce the total expense of owning securities and it can dramatically reduce taxes owed.
FALLING INTEREST RATES--RISING CORPORATE PROFITS--SURPLUS LIQUIDITY--EXTRAORDIARY VALUATIONS--WHAT IS WRONG WITH THIS MARKET? BUY--BUY--BUY! BUT AVOID HIGH COST FUNDS!
OUCH! HOW TO SPEND $3 MILLION FOOLISHLY!
The US Securities and Exchange Commission has posted valuable information about mutual fund fees. Mutual funds typically charge more fees than cows have teats. If you are not careful you will be milked before, after and while you turn around.
The SEC site offers a free Mutual Fund Cost Calculator. This calculator can be used to find out how much the fees will cost over a specific holding period.
Investors are often fooled into investing in "no-load" funds because these funds do not charge sales fees or perhaps redemption fees. Investors often ignore a long list of other fees because they seem small. One should note that fees are expressed as a percentage of total assets and assessed regularly. If you own funds, you should use the calculator to see just how much you are paying for services--you may be surprised.
I have run the calculations on two funds that do not have sales fees or redemption fees. To keep the examples simple, I have aggregated their assortment of fees into single numbers.If you and your spouse have reached the age of 50, it is probable that at least one of you will live to be over 90, therefore I have used 40 years as the holding period. Of course the holding period may be much longer if the funds are held in retirement accounts with children or grandchildren as the beneficiaries (a good estate plan will keep retirement funds compounding tax free for as long as possible).
In each case, I have assumed the fund will earn 11%. Eleven percent results in an under-statement of costs because the average stock does better than 11%. Smaller companies have returned 14% compounded on average for the past 50 years. Using 14% would make the numbers so large that you might not believe the results; I stuck with 11% in both examples.
Example one is a low cost fund. It charges total fees equal to one half of one percent of assets. A $100,000 investment in this fund would result in total fees paid over 40 years of $277,322 and the foregone compounded earnings would be $903,612. The total drag on the account would be $1,180,934. The value of the account after 40 years would be $5,319,151.
Example two is a high cost fund. It charges total fees of 1.75% of assets. A $100,000 investment in this fund would result in total fess paid over 40 years of $666,531 and the foregone compounded earnings would be $2,625,650. The total drag on the account would be $3,292,181.62. The value of the account after 40 years would be $3,207,905.11!
Can you see why I avoid mutual funds? In the second example, the investor puts-up 100% of the money and gets half of the money produced by the investments.
Please note that insurance companies and mutual fund companies sell many products that include sales charges and additional fees which were not included in these examples. Insurance and mutual fund representatives are not bad people. Neither is the Fuller Brush Representative. Fuller Brush makes good products but those who are willing to buy at department or discount stores can save a lot. Buying a high fee mutual fund is like buying a kitchen tool from a Fuller Brush Rep. and then paying an annual maintenance fee, a replacement contract fee and an annual fee to pay for regular mail solicitations.Fifteen stocks in diverse industries typically gives one 97% to 99% of the diversification benefit of a mutual fund (besides, many funds do not buy what they say they buy or are poorly diversified). The benefits of further diversification are minor. Owning more than 25 stocks can be cumbersome. Owning individual stocks can dramatically reduce the total expense of owning securities and it can dramatically reduce taxes owed.
FALLING INTEREST RATES--RISING CORPORATE PROFITS--SURPLUS LIQUIDITY--EXTRAORDIARY VALUATIONS--WHAT IS WRONG WITH THIS MARKET? BUY--BUY--BUY! BUT AVOID HIGH COST FUNDS!
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