INTELLIGENT INVESTING INVESTING PERSONAL FINANCE BOOKS ASK MIKE? ABOUT DISCLAIMER Why Impact of Fees On Mutual Funds Is Only Part Of Challenge To Investors When You Factor In Asset Turnover And Short Term Capital Gain distributions POSTED BY: INTELLIGENTINVESTING.COM MAY 16, 2019 When I teach investing, I spend a lot of time helping the average investor understand the impact of fees on investment results over a long period of time. When I first started teaching my view was find great companies at a reasonable price that have long term investment characteristics. Stocks that fit this type of thinking are there such as Coca-Cola, American Express, Google, Apple, Berkshire Hathaway, an JP Morgan to name a few. But over time I realized it is hard for the average investor to find and know when to buy these stocks and that the average investor’s best avenue to invest in stocks is to buy into a low fee cost index funds. Investing in index funds, such as the S&P 500, has a significant impact on the value of your investment over a long period do to low fees compared to how fees of the typical mutual fund impact long term investment results. The investment community will work to convince you that various mutual funds can beat the S&5 500. And that may be true in short term. The 90 year return on the S&P 500 is approximately 9.8%. And over the last 15 years the S&P 500 has beaten 92% of all mutual funds. And fund results in many instances that look like they beat the index incur other hidden fees such as fund turnover ratios. Based on combination of mutual fund fees and turnover rations the table below would indicate the average fund to beat the 90 year S&P 500 Index history would have to earn on average 3-4% points higher to make up for fees and impact of annual stock turnover and short versus long term capital gain tax rates. A $10,000 investment earning the 90 year average of approximately $9.5% after fees (assumes investment in Vanguard S&P 500 Index fund) becomes $152,203 in 30 years. Investing in the index incurs fees of roughly 3/10ths of percent. Most mutual funds report fees that average roughly 1-2%. So over long period of time that can accumulate to a significant amount of lost capital to as an individual investor. As shown in the above chart a $10,000 investment with 1-2 percent over thirty years cost the average investor approximately $30-60 thousand dollars over thirty year period. With fees at the end of 30 years those investors that invested in mutual fund with 1-2 percent fee averages end up not with $152K if invested in the S&P 500 Index but rather $90 to $120 K after fees. And if fees after adding impact of fund turnover and short term versus long tax effects result over 30 years of having only $60K versus $152K if invested in the S&P 500. What starts out looking like a small amount in fees in the early years ends long term costing investors significantly. Some will say well I will never plan to hold an investment for 30 years. And you may not hold an investment for 30 years, but no matter what investment you hold unless you are investing in common stocks held for long term (no fees while you hold the stock) or investing in a low fee index fund your investment results may be significantly impacted by fees. A little understanding of what the fund turnover ratio does too fees for the average individual investors is warranted. As of February 2019 the average mutual fund turnover ratio was approximately 65%. In some years such as 2007-2008 this mutual fund annual turnover ratio was over 100% and has reached as high as 165% in some years. The fund turnover ratio has hidden fees by incurring trading transaction costs when stocks are constantly bought and sold. And on top of this turnover rate there are tax consequences because of short term capital gain tax rates versus long term capital gain tax rates. Several studies have shown this turnover + short term tax consequences to the individual can add 2-3% per year in additional fees. Of course if you do not like the idea of a mutual fund, you can buy a basket of 5-7 A+ rated individual stocks as noted above and hold them and have zero fees over the period you hold them. Individual investors should ask these questions from their investment advisors and / or financial broker: 1) What is annual fee charged for the fund you are selling versus the S&P 500 index fees which average roughly 3/10ths of 1%? 2) What is the average turnover ratio for the investment that is being recommended? Turnover ratios greater than 5% will cost you lot of money over long periods of time? 3) For the last 15 years in the fund being recommended for purchase what is its performance versus the S&P 500 Index? Note asking over 15 years, ver 1-3 years ensure you focus on long term investments. 4) What is the broker or advisor fee in the arrangement with you? Many are moving to fee only advice which may be good, but then that amount has to be factored into fees versus an investment in S&P 500 Index. The advisors will say the fees provide other advice such as estate planning, financial planning for retirement, budgeting and as individuals there is value in that service. Facebook Twitter LinkedIn Email Previous post BE THE FIRST TO COMMENT ON "WHY IMPACT OF FEES ON MUTUAL FUNDS IS ONLY PART OF CHALLENGE TO INVESTORS WHEN YOU FACTOR IN ASSET TURNOVER AND SHORT TERM CAPITAL GAIN DISTRIBUTIONS" Leave a comment Your email address will not be published. Comment Name * Email * Website Email Subscription: RECENT Why Impact of Fees On Mutual Funds Is Only Part Of Challenge To Investors When You Factor In Asset Turnover And Short Term Capital Gain distributions When Getting Financial Advisor Help After Winning PowerBall or Mega It May Pay to be Rational Why Investing In Companies with High Returns On Capital and A+ Financial Ratings Versus Focus On Dividend Payments May Be More Important? CATEGORIES Uncategorized ARCHIVES May 2019 April 2019 COPYRIGHT 2021 | MH NEWSDESK LITE BY MH THEMES