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Today?s column is like the public service announcements 30A Radio ( www.30aradio.org? ) airs urging swimmers to stay out of the gulf when double red flags are posted. How can you tell if your portfolio is swimming in dangerous waters? To steal a line from Longfellow, ?Listen, my children, and you shall hear.?
Get a clear sheet of paper. If you want to be environmentally correct, just use the reverse of a scrap sheet. Make an ?x? axis and a ?y? axis on the paper. That may be over the head of Auburn folks, so enlist the aid of an Auburn engineering grad to help (if my brother Scott were in town, he would be a good candidate). At the point where the two lines intersect, draw a 45-degree line.
Here comes the hard part. By the ?y? axis (vertical line), write ?annual expenses,? and by the ?x? axis, write ?chance mutual fund will suck.? What can be determined from the graph? The higher your annual expenses, the greater your chances that your mutual fund will suck.
Let me thwart any skeptics; I don?t make stuff up like Newt Gingrich does. Neither will I leave my wife for someone 23 years my junior, but that?s another issue. Morningstar (Aug. 9, 2010, ?Fund Spy,? Russell Kinnel) examined five categories of equity and fixed income mutual funds. They chose multiple time points from 2005 to 2008 and computed the returns through March 2010. Funds were sorted into quintiles based on expenses.
Morningstar compared the performance of the cheapest funds with their more expensive cousins. Kinnel, director of Morningstar Mutual Fund Research, wrote, ?In every single time frame and data point tested, low-cost funds beat highcost funds.? Expense ratios, when compared with Morningstar?s patented ratings, were more reliable. Kinnel writes: ?They (expense ratios) worked every time.? Morningstar?s vaunted Star Ratings predictive ability was only valid in 59 out of 70 observations (84 percent). In both U.S. and international stock funds, returns were higher in every data point for the cheapest funds compared to the five-star ratings.
There are no free lunches in the investment universe, but this comes pretty darn close.
There is no excuse to ignore mutual fund expenses unless you enjoy leaving money on the table. It?s your money. If you want to throw it away, knock yourself out. Actively managed funds with low expenses include American Funds, Dodge and Cox, Fidelity, Mairs and Power, Selected Funds and T. Rowe Price. The low-cost leaders, though, will be passively managed funds and/or exchange-traded funds from Vanguard, iShares, DFA and Select Sector SPYDRs, among others.
The mutual fund industry has done investors scant favors. The average annual expense ratio of a mutual fund has skyrocketed from .7 percent in 1961 to 1.44 percent in 2009 (?Bogle on Mutual Funds? and the Investment Company Institute).
Historically, funds have hidden their annual costs from investors, often burying them deep in the bowels of a prospectus. After years of delay and obfuscation, finally under Obama appointee Mary Schapiro, the Securities and Exchange Commission is forcing more disclosure of fees, specifically requiring that funds ?identify and more clearly disclose distribution fees.? The mutual fund industry, allied with their Congressional cronies, has tenaciously fought these initiatives.
Morningstar reckons ?Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.?
Failure to heed that warning is as dangerous as swimming with double red flags.
Buz Livingston is a CERTIFIED FINANCIAL PLANNER. He operates Livingston Financial Planning Inc. Contact him directly at 850-267-1068 or at buz@Livingston ? Financial.net? .
BUZ LIVINGSTON
Just Plain Talk
WWW.WALTONSUN.
Today?s column is like the public service announcements 30A Radio ( www.30aradio.org? ) airs urging swimmers to stay out of the gulf when double red flags are posted. How can you tell if your portfolio is swimming in dangerous waters? To steal a line from Longfellow, ?Listen, my children, and you shall hear.?
Get a clear sheet of paper. If you want to be environmentally correct, just use the reverse of a scrap sheet. Make an ?x? axis and a ?y? axis on the paper. That may be over the head of Auburn folks, so enlist the aid of an Auburn engineering grad to help (if my brother Scott were in town, he would be a good candidate). At the point where the two lines intersect, draw a 45-degree line.
Here comes the hard part. By the ?y? axis (vertical line), write ?annual expenses,? and by the ?x? axis, write ?chance mutual fund will suck.? What can be determined from the graph? The higher your annual expenses, the greater your chances that your mutual fund will suck.
Let me thwart any skeptics; I don?t make stuff up like Newt Gingrich does. Neither will I leave my wife for someone 23 years my junior, but that?s another issue. Morningstar (Aug. 9, 2010, ?Fund Spy,? Russell Kinnel) examined five categories of equity and fixed income mutual funds. They chose multiple time points from 2005 to 2008 and computed the returns through March 2010. Funds were sorted into quintiles based on expenses.
Morningstar compared the performance of the cheapest funds with their more expensive cousins. Kinnel, director of Morningstar Mutual Fund Research, wrote, ?In every single time frame and data point tested, low-cost funds beat highcost funds.? Expense ratios, when compared with Morningstar?s patented ratings, were more reliable. Kinnel writes: ?They (expense ratios) worked every time.? Morningstar?s vaunted Star Ratings predictive ability was only valid in 59 out of 70 observations (84 percent). In both U.S. and international stock funds, returns were higher in every data point for the cheapest funds compared to the five-star ratings.
There are no free lunches in the investment universe, but this comes pretty darn close.
There is no excuse to ignore mutual fund expenses unless you enjoy leaving money on the table. It?s your money. If you want to throw it away, knock yourself out. Actively managed funds with low expenses include American Funds, Dodge and Cox, Fidelity, Mairs and Power, Selected Funds and T. Rowe Price. The low-cost leaders, though, will be passively managed funds and/or exchange-traded funds from Vanguard, iShares, DFA and Select Sector SPYDRs, among others.
The mutual fund industry has done investors scant favors. The average annual expense ratio of a mutual fund has skyrocketed from .7 percent in 1961 to 1.44 percent in 2009 (?Bogle on Mutual Funds? and the Investment Company Institute).
Historically, funds have hidden their annual costs from investors, often burying them deep in the bowels of a prospectus. After years of delay and obfuscation, finally under Obama appointee Mary Schapiro, the Securities and Exchange Commission is forcing more disclosure of fees, specifically requiring that funds ?identify and more clearly disclose distribution fees.? The mutual fund industry, allied with their Congressional cronies, has tenaciously fought these initiatives.
Morningstar reckons ?Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.?
Failure to heed that warning is as dangerous as swimming with double red flags.
Buz Livingston is a CERTIFIED FINANCIAL PLANNER. He operates Livingston Financial Planning Inc. Contact him directly at 850-267-1068 or at buz@Livingston ? Financial.net? .
BUZ LIVINGSTON
Just Plain Talk
