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Learning, Sharing, and Teaching => Investor Alley => Topic started by: greggieP3 on June 26, 2017, 01:14:09 PM

Title: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: greggieP3 on June 26, 2017, 01:14:09 PM
Thanks to Personal Capital, I recently realized (to my horror) that my Roth IRA through USAA is charging me a 1.52% expense ratio for the fund with which I have all my assets invested. Apparently they charge more if the fund is more aggressive, and this fund's mix is 80% stocks/20% bonds.

For background, I'm 27 and have only had this account open for a little over a year. In April 2016, I contributed $11,000 to the account to meet the max contribution for 2015 and 2016, and in January 2017, I made the full $5,500 contribution for the current year. In addition, I'm maxing out my 403(b) through work and have a taxable account through Vanguard, so I'm saving a very healthy percentage of my income.

Now, in the past year, this USAA fund has returned 12.59%.

So, I'm considering 2 options.

1. GTFO now, since that expense ratio is too damn high.

2. Since this is a pretty healthy return, should I stick with it for now and see how it continues to perform? I suppose I'd sell it after 2 consecutive years of returns of sub 8.5%.

What do you all think?

Sidenote, I'm actually highly disappointed in USAA for charging such high fees. I think they typically offer exceptional customer service and reasonable prices for their insurance services, so this seems totally out of line with how I picture them. Oh well...
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: Vindicated on June 26, 2017, 01:22:02 PM
Check out Vanguard's performance for similar funds.  I think you'll find that they performed the same or better, even if you didn't count the 1.5% expense ratio.

https://investor.vanguard.com/etf/list#/etf/name/month-end-returns (https://investor.vanguard.com/etf/list#/etf/name/month-end-returns)

I say sell and move to Vanguard.
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: MrGville on June 26, 2017, 03:05:12 PM
I'd move it to a low cost fund.  I just logged onto my fidelity account, and the S&P 500 fund i have has gone up 17% the past year and charges a fee of 0.045%. 
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: dandarc on June 26, 2017, 03:18:38 PM
I'd sell.  For reference, LifeStrategy Growth at Vanguard (VASGX ) - an all-in-one 80/20 fund is doing much better than that fund at an 80%+ discount on expenses.

Here's what VASGX and UCAGX have done since about when USAA fund started.  Not even close over the almost 5 years.
https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1496260800000&chddm=494224&cmpto=MUTF:UCAGX&cmptdms=0&q=MUTF:VASGX&&ei=g3lRWfGnLNekmAHEi6jQDQ

Edited - chart had it right, but I typed the wrong ticker for the Vanguard fund originally in the post.
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: WildJager on June 26, 2017, 05:27:59 PM
USAA is expensive due to being a smaller investment bank.  I use them out of convenience, but only for the S&P 500 fund (Vanguard still crushes the fees relatively speaking).  I wouldn't bother with any active managed funds by USAA.  They're expensive and under perform. 
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: greggieP3 on June 26, 2017, 06:29:36 PM
Looks like I'm going to sell. I think we're all on the same page that it's impossible to justify such a fee.

Thanks for the advice everyone!
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: smallstache on June 27, 2017, 12:42:08 AM
USAA is great for property insurance, good for banking, okay for brokerage services, but bad for mutual funds.
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: respond2u on June 27, 2017, 12:57:47 AM
Expense ratios are irrelevant. Total return is *all* that matters.

Think it through. Let's say you have $1000 to invest with these alternatives:
 A. Fund A charges a $10 fee and gives you $100 per year
 B. Fund B charges a $1 fee and gives you $90 per year

Would you put all your money in Fund A or Fund B? If you pick Fund B, pick again : )

--

Having said that, for funds that are essentially commodities (80/20 funds, S&P indexes, etc.), the expense ratio is the only differentiator and it will show up in the total return (where less expense is better).

--

I'll also say that unless you're planning on retiring in the next 10 years, you should be 100% in stocks. Just make sure not to sell.
(see here: https://earlyretirementnow.com/2016/08/17/bond-diversification-is-a-myth/  for one takedown of the "have some bonds" myth.)

--
Quibble: If you're in "decumulation", then you may believe dividends are all that matters, not total return. That's not worth going into here...
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: Travis on June 27, 2017, 01:14:01 AM
USAA is great for property insurance, good for banking, okay for brokerage services, but bad for mutual funds.

Seconded. They are mediocre at best for investment services.  It's not their cup of tea and they had no business getting into the game.  They hosed me the first couple years of my investing history with fees.  It damages their credibility with their other (much more) beneficial services.

Think about your mutual fund this way: you're paying 1.5% for them to achieve what the overall market is doing for almost free.  They'll beat the market an almost insignificant amount of the time, and when they're under-performing the market you're still paying 1.5% for the privilege of letting them do so.
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: Car Jack on June 27, 2017, 07:00:18 AM
Expense ratios are irrelevant. Total return is *all* that matters.

Unless you've got a Delorean with the capability to hit 88 mph, this is wrong.

Let me ask you this.  What will be the return on the fund of your choice for the year going forward?  I'd like only 2 digit accuracy.  The answer is that you don't know, I don't know, nobody knows.  But if I ask, what is the cost, then, well, we all can look and see this.  Cost is all we know going forward.  Thinking that a high fee fund has magical unicorn pixidust that allows their wizards to pick all the winners is misguided thinking. 

Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: mustache you a question on June 27, 2017, 07:31:05 AM
Expense ratios are irrelevant. Total return is *all* that matters.

Think it through. Let's say you have $1000 to invest with these alternatives:
 A. Fund A charges a $10 fee and gives you $100 per year
 B. Fund B charges a $1 fee and gives you $90 per year

Would you put all your money in Fund A or Fund B? If you pick Fund B, pick again : )

--

Having said that, for funds that are essentially commodities (80/20 funds, S&P indexes, etc.), the expense ratio is the only differentiator and it will show up in the total return (where less expense is better).

--

I'll also say that unless you're planning on retiring in the next 10 years, you should be 100% in stocks. Just make sure not to sell.
(see here: https://earlyretirementnow.com/2016/08/17/bond-diversification-is-a-myth/  for one takedown of the "have some bonds" myth.)

--
Quibble: If you're in "decumulation", then you may believe dividends are all that matters, not total return. That's not worth going into here...

I don't mean to be a jerk but you are the first person on this site that I've seen say expense ratios don't matter.  Unless you can get the Madoff guarantee of double digit returns each year, expense ratios are extremely important.  They will choke off your returns.  I say sell and get into a low cost index fund.
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: dandarc on June 27, 2017, 07:48:57 AM
Expense ratios are irrelevant. Total return is *all* that matters.

Unless you've got a Delorean with the capability to hit 88 mph, this is wrong.

Let me ask you this.  What will be the return on the fund of your choice for the year going forward?  I'd like only 2 digit accuracy.  The answer is that you don't know, I don't know, nobody knows.  But if I ask, what is the cost, then, well, we all can look and see this.  Cost is all we know going forward.  Thinking that a high fee fund has magical unicorn pixidust that allows their wizards to pick all the winners is misguided thinking.
Don't forget the flux capacitor and some way of generating 1.21 gigawatts.

The research backs this up - best predictor of future returns is lower expense ratio, assuming similar risk profiles of the funds being compared.  Sure you can make a better return by skewing towards Small-cap or REITs or whatever, but that comes with higher volatility.  Kind of a fools errand to try to pick sectors or market caps due to this, of course:
(http://seicblogs.com/advisor-practice-management/files/2014/03/AssetClass.png)
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: smallstache on June 27, 2017, 10:21:12 AM
(http://seicblogs.com/advisor-practice-management/files/2014/03/AssetClass.png)

Is there an update to this chart?  The data is 3 1/2 years old.
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: Travis on June 27, 2017, 10:40:21 AM
Expense ratios are irrelevant. Total return is *all* that matters.

Think it through. Let's say you have $1000 to invest with these alternatives:
 A. Fund A charges a $10 fee and gives you $100 per year
 B. Fund B charges a $1 fee and gives you $90 per year

Would you put all your money in Fund A or Fund B? If you pick Fund B, pick again : )



You hope you'll get $90 or $100 next year. You will be charged $1 or $10.  Now make your decision.
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: dougules on June 27, 2017, 11:06:55 AM
You're paying $250/year to have this fund, and that's not counting lost compounding returns in the future.  Just because it's returned 12.5% this year has no bearing on what it will do in the future.  If anything, it may mean it's more risky than just a broad index. 

I'd say GTFO and find something with lower expense ratios.  Then you can spend that $250 on something better. 
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: runewell on June 27, 2017, 11:55:42 AM
Expense ratios are irrelevant. Total return is *all* that matters.

Having said that, for funds that are essentially commodities (80/20 funds, S&P indexes, etc.), the expense ratio is the only differentiator and it will show up in the total return (where less expense is better).

[sarcasm] Nice explanation. [/sarcasm] 
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: Roboturner on June 27, 2017, 03:49:53 PM
GTFO,

my Vanguard funds yielded 16.8% last year with an avg expense ratio of 0.07% - you can do much better, even a monkey couldve made money last year
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: respond2u on June 27, 2017, 11:18:09 PM
Expense ratios are irrelevant. Total return is *all* that matters.

Think it through. Let's say you have $1000 to invest with these alternatives:
 A. Fund A charges a $10 fee and gives you $100 per year
 B. Fund B charges a $1 fee and gives you $90 per year

Would you put all your money in Fund A or Fund B? If you pick Fund B, pick again : )



You hope you'll get $90 or $100 next year. You will be charged $1 or $10.  Now make your decision.

Kinda my point. Fees and outcomes aren't that related. Best results typically come from just buying the market, and you can do that for cheap. But it's not the expense ratio that matters, it's the total return.
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: respond2u on June 27, 2017, 11:50:28 PM
Expense ratios are irrelevant. Total return is *all* that matters.

Think it through. Let's say you have $1000 to invest with these alternatives:
 A. Fund A charges a $10 fee and gives you $100 per year
 B. Fund B charges a $1 fee and gives you $90 per year

Would you put all your money in Fund A or Fund B? If you pick Fund B, pick again : )



You hope you'll get $90 or $100 next year. You will be charged $1 or $10.  Now make your decision.


OP, and the rest of us, can only compare funds looking backwards. If the fund he has kept up with the S&P (or whatever his benchmark is), then it doesn't matter their fees. But like I said in last post, buying some total market etf is probably the best bet (and they have low fees).
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: Travis on June 28, 2017, 12:43:48 AM
Expense ratios are irrelevant. Total return is *all* that matters.

Think it through. Let's say you have $1000 to invest with these alternatives:
 A. Fund A charges a $10 fee and gives you $100 per year
 B. Fund B charges a $1 fee and gives you $90 per year

Would you put all your money in Fund A or Fund B? If you pick Fund B, pick again : )



You hope you'll get $90 or $100 next year. You will be charged $1 or $10.  Now make your decision.


OP, and the rest of us, can only compare funds looking backwards. If the fund he has kept up with the S&P (or whatever his benchmark is), then it doesn't matter their fees. But like I said in last post, buying some total market etf is probably the best bet (and they have low fees).

How can total return be the only thing that matters if you don't know what it will be?  You're saying to cheaply buy the whole market and at the same time to ignore fee costs. While buying the whole market is great advice which everyone here advocates, keeping an eye on expense ratios is one of the few aspects of investing you actually have control over. It's important and can cost someone a fortune if you pay more than you need to.
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: fattest_foot on June 28, 2017, 08:09:12 AM
GTFO,

my Vanguard funds yielded 16.8% last year with an avg expense ratio of 0.07% - you can do much better, even a monkey couldve made money last year

Came to post this. 12.5% sounds good because it beats the historical average, but almost every year since 2009 has been a bull (there were some flat ones in 2014-2015, but DCA'ing had some good dips to buy).
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: Roboturner on June 28, 2017, 08:38:39 AM
GTFO,

my Vanguard funds yielded 16.8% last year with an avg expense ratio of 0.07% - you can do much better, even a monkey couldve made money last year

Came to post this. 12.5% sounds good because it beats the historical average, but almost every year since 2009 has been a bull (there were some flat ones in 2014-2015, but DCA'ing had some good dips to buy).


exactly, i.e. Feb 2016 DOW was 15k, ended at 20k, with a 13.4% gain over the year.
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: respond2u on June 30, 2017, 01:39:37 AM
Expense ratios are irrelevant. Total return is *all* that matters.

Think it through. Let's say you have $1000 to invest with these alternatives:
 A. Fund A charges a $10 fee and gives you $100 per year
 B. Fund B charges a $1 fee and gives you $90 per year

Would you put all your money in Fund A or Fund B? If you pick Fund B, pick again : )



You hope you'll get $90 or $100 next year. You will be charged $1 or $10.  Now make your decision.


OP, and the rest of us, can only compare funds looking backwards. If the fund he has kept up with the S&P (or whatever his benchmark is), then it doesn't matter their fees. But like I said in last post, buying some total market etf is probably the best bet (and they have low fees).

How can total return be the only thing that matters if you don't know what it will be?  You're saying to cheaply buy the whole market and at the same time to ignore fee costs. While buying the whole market is great advice which everyone here advocates, keeping an eye on expense ratios is one of the few aspects of investing you actually have control over. It's important and can cost someone a fortune if you pay more than you need to.

Backtest SPY, VOO, and IVV at portfoliovisualiser. Decide which you want to buy. Then look at expense ratios. We don't know the future. If you're guessing, you can guess that a lower expense ratio is better, but there are more variables than that which play into the expense ratio. So just backtest the total return.
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: Travis on June 30, 2017, 12:01:54 PM
Expense ratios are irrelevant. Total return is *all* that matters.

Think it through. Let's say you have $1000 to invest with these alternatives:
 A. Fund A charges a $10 fee and gives you $100 per year
 B. Fund B charges a $1 fee and gives you $90 per year

Would you put all your money in Fund A or Fund B? If you pick Fund B, pick again : )



You hope you'll get $90 or $100 next year. You will be charged $1 or $10.  Now make your decision.


OP, and the rest of us, can only compare funds looking backwards. If the fund he has kept up with the S&P (or whatever his benchmark is), then it doesn't matter their fees. But like I said in last post, buying some total market etf is probably the best bet (and they have low fees).

How can total return be the only thing that matters if you don't know what it will be?  You're saying to cheaply buy the whole market and at the same time to ignore fee costs. While buying the whole market is great advice which everyone here advocates, keeping an eye on expense ratios is one of the few aspects of investing you actually have control over. It's important and can cost someone a fortune if you pay more than you need to.

Backtest SPY, VOO, and IVV at portfoliovisualiser. Decide which you want to buy. Then look at expense ratios. We don't know the future. If you're guessing, you can guess that a lower expense ratio is better, but there are more variables than that which play into the expense ratio. So just backtest the total return.

Something about past performance and future returns. I can't remember where I read that...
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: Zariana on June 30, 2017, 10:10:56 PM
I have recently gone to index or low fee funds with one exception: international small cap. The index funds seem to perform worse over every time scale than well-managed funds.

With international large cap you are effectively betting on the economies (and currencies) of the countries in the fund, but that the small cap adds a lot more complexity to the issue and a decently managed fund can weed out companies that don't have significant running room to grow.
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: Radagast on July 01, 2017, 09:20:56 AM
I have recently gone to index or low fee funds with one exception: international small cap. The index funds seem to perform worse over every time scale than well-managed funds.
Which one?
Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: respond2u on July 02, 2017, 02:53:26 AM
Expense ratios are irrelevant. Total return is *all* that matters.

Think it through. Let's say you have $1000 to invest with these alternatives:
 A. Fund A charges a $10 fee and gives you $100 per year
 B. Fund B charges a $1 fee and gives you $90 per year

Would you put all your money in Fund A or Fund B? If you pick Fund B, pick again : )



You hope you'll get $90 or $100 next year. You will be charged $1 or $10.  Now make your decision.


OP, and the rest of us, can only compare funds looking backwards. If the fund he has kept up with the S&P (or whatever his benchmark is), then it doesn't matter their fees. But like I said in last post, buying some total market etf is probably the best bet (and they have low fees).

How can total return be the only thing that matters if you don't know what it will be?  You're saying to cheaply buy the whole market and at the same time to ignore fee costs. While buying the whole market is great advice which everyone here advocates, keeping an eye on expense ratios is one of the few aspects of investing you actually have control over. It's important and can cost someone a fortune if you pay more than you need to.

Backtest SPY, VOO, and IVV at portfoliovisualiser. Decide which you want to buy. Then look at expense ratios. We don't know the future. If you're guessing, you can guess that a lower expense ratio is better, but there are more variables than that which play into the expense ratio. So just backtest the total return.
I will pile on by saying you are mistaken in your core premise that past performance has any predictive power on future returns (note: for US stock mutual funds...it may be helpful for other asset classes).

Study after study has proven that it does not predict.  I proved this mathematically, as an exercise for a grad statistics class, on minicomputers in the early 1980s, so to see it repeatedly trotted out as a justification for sticking with high fee funds tends to irk me.

Asset class, leverage, and diversification are the primary factors impacting returns. 

Yes, some beta and alpha seeking strategies run higher fees.  So strictly speaking, perhaps you mean to suggest fees within and asset class/strategy are what matter, not absolute lowest fees.  That is something i could support.  Examples: if your portfolio strategy seeks something like X leverage of returns because your fund prospectus says it wants a high risk, high expected returns; , or if your fund is annuity-like and seeks to guarantee income because it wants to provide a low risk, guaranteed income as its strategy (these tend to have higher base costs requiring slighly higher fees).

Certain strategies may require higher fees, so if you are on board with that, it can be ok. 

Another example: a group of real estate investors making a speculative, leveraged, real estate plays, use 1031 exchange vehicles, etc.  I might be willing to pay a land, buyer, developer and property manager 1%+ in management fees, expecting perhaps great upside returns.  That could be a better investment than an index fund with .05% fees, depending on my personal investment preferences.

I'll point out that we know that past performance isn't predictive because we've studied past performance...

That's why I'm saying that total return is more important than fees. You can use fees as a proxy for guessing the future, but we're all trying to guess future total returns. The only real data we have about that is the past, and it is horrible. What it really says is that it's neither fees nor total return that matters, it's the discipline to keep investing when the market is down.

Someone said "fees are set, so go with that", and that's relevant if you're comparing funds in the same goal (VOO, SPY, IVV), but I don't believe it's relevant across goal.

But it won't help with the 3-fund portfolio or 4-fund portfolio or believe the small cap premium, or will go into the other styles you mentioned.

My understanding is that the best total return comes from investing in the entire market, and staying in. That's more important than the fees.





Title: Re: Keep or sell a fund with a 12.5% return last year but 1.5% expense ratio?
Post by: chasesfish on July 04, 2017, 12:45:28 PM
I'd move it to a low cost fund.  I just logged onto my fidelity account, and the S&P 500 fund i have has gone up 17% the past year and charges a fee of 0.045%.

This is spot on.  Roll that account over immediately - I prefer Fidelity for my brokerage account, but Vanguard/Schwab/TD Ameritrade are all good choices.   Leaving that money in USAA is the equivalent of putting $240 cash in a brown paper bag and running a lawnmower over it, except USAA takes it from you quicker than the lawnmower.