Author Topic: Keep the funds I have or switch to lower cost funds?  (Read 2285 times)

hokiegb

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Keep the funds I have or switch to lower cost funds?
« on: June 20, 2013, 06:45:19 AM »
I have a question for the forum:

I was reviewing my accounts today and found that I have a decent chunk of money sitting in (relatively) high expense ration funds. Specifically, I have:
20K in a Columbia fund with a 0.94 expense ratio and 27K in a Nuveen fund with a 0.51 expense ratio.
I looked up equivalent funds on Vanguard, and should be able to get very similar rate of return, but with expense ratios of 0.05 and 0.10 respectively to keep the same asset classes.

The question is, would the savings on the better expense ratios be worth taking the tax hit this year for selling of the funds to reinvest with Vanguard? I don't really know how to run that math myself, so I'm open for suggestions on how to calculate it.

Thanks!

jfer_rose

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Re: Keep the funds I have or switch to lower cost funds?
« Reply #1 on: June 20, 2013, 06:52:58 AM »
Are these taxable accounts then? There aren't any tax implications if you are transferring retirement accounts from one company to another-- in that case it isn't considered a sale.

hokiegb

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Re: Keep the funds I have or switch to lower cost funds?
« Reply #2 on: June 20, 2013, 07:30:37 AM »
They are not retirement accounts, so I'm pretty sure I would have to sell off the funds that I have and then purchase the Vanguard funds.

matchewed

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Re: Keep the funds I have or switch to lower cost funds?
« Reply #3 on: June 20, 2013, 07:38:49 AM »
Try this link and see if it helps. http://apps.finra.org/fundanalyzer/1/fa.aspx

*Edit* also keep in mind how long you intend to hold this money for.

aclarridge

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Re: Keep the funds I have or switch to lower cost funds?
« Reply #4 on: June 20, 2013, 11:26:33 AM »
What's your tax rate? That's a pretty important variable I think you left out.

I think the way I would make the decision is to just figure out the value of your holdings in each scenario through time, and calculate how long it takes for the extra fees to cancel out the effect of the tax hit.
So Option 1: Sell today and move to vanguard. Tax hit is X$. Assume the fund yields the same as it did in the past 20 years or something.
Option 2: Keep what you have. Make same assumption about fund's yield, but subtract the difference in expenses each year.

Do this in excel, one row for each year. Once you have got the formulas right, drag it down and see at what point Option 1 beats Option 2. That information should help with the decision.

The only way I could see Option 2 being better long-term is if both of the following are true:
1. you have a very high tax rate, and
2. you either never sell these investments or would only sell them far ahead in the future, so the eventual tax hit when discounted back to today is negligible.

EDIT: When you've done the analysis, go back and modify your assumption about expected return - see what happens to your breakeven point when you change it. It's good to know what your worst-case is, and if you're fine with that then it's a good move.
« Last Edit: June 20, 2013, 01:39:43 PM by FI40 »

aj_yooper

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Re: Keep the funds I have or switch to lower cost funds?
« Reply #5 on: June 23, 2013, 12:58:35 PM »
I browsed Vanguard re Nuveen and Columbia funds.  The various funds often have a load and a redemption fee as well as an ER.  Carefully read your prospectus to see what the full costs are and make your decision.  If you have a redemption fee, that could make the decision easier.  The fund business is not a fun business for a typical investor.