The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: tariskat on March 09, 2014, 07:59:31 AM
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I opened an IRA through t rowe price a year or two ago because I thought I didn't have the minimum to invest in vanguard. Now I'm looking again and their minimum is just 1,000$, which of course I have in my t Rowe price account. Price has a .78 expense ratio, and vanguard had a .18 ER for target retirement accounts for my age, 27. I have about 3200$ in my account and I contribute 100$ a month when I hold enough jobs. I'm a grad student, paying off deferred student loans, no other debt to speak of. All my SLs are between 5.25% and 3.25%, so I see no reason not to invest too.
I like the web UI of t rowe price, it's incredibly easy to say how much you want to transfer and how often, I have used and found very helpful their customer service, and I have never used vanguard. Other than that I have no real loyalty to Price. Is there any downside to opening a target retirement account in vanguard and moving my target retirement from Price into it?
Thanks in advance!
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T Rowe Price has a lot of actively managed funds that have done very well for 10 years or longer. That said, it's inexcusable to charge 0.78 percent for a fund of funds that automatically rebalances. I would compare the underlying investments in the T Rowe Price target date fund to its counterpart at Vanguard, but I suspect the management fee outweighs the differences in performance. If that is indeed the case, then moving the money to Vanguard makes sense.
As you gain more investment experience, you may want to re-look at what T Rowe Price offers.
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I think that both TRP and VG are great companies. I have fund investments in both, plus a brokerage account with Vanguard.
There is a very good excuse for the ER to have a 0.6% difference. Most of the funds in the TRP product are actively managed, while all the underlying funds in the VG target dates are passive. You may want to take a closer look and see if you are getting something for the cost of the actively managed funds. Morningstar gives the TRP TD fund 5 stars and the VG 4 stars, but please look deeper than that.
The TRP TD funds have some real good underlying investments, some of which, by themselves are closed to new investors.
I am not in any TD funds myself, but a variety of mutual funds, both active and passive, as well as some ETF's. I do my own rebalancing and research. It keeps me busy. Best of luck to you in your investment career, but I wouldn't jump the good ship TRP quite yet.
Dave
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The question is whether the 0.78 fee is on top of the ER's of the underlying funds.
Many of T Rowe Price's sector funds and small and mid cap funds have done exceptionally well over time. I have a number of them and have had them for years. Nothing Vanguard has can compare. If their better closed funds are available through the target date fund, then it's probably worth the effort to compare the target date funds as well as the ER's.
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A lot of people in these forums seem to put an undue amount of weight on expense ratio. Remember, expense ratio is already included when you look at the fund's return. Therefore, the most important figure when comparing two similar funds is the rate of return. Obviously you have to weigh that against the holdings of the fund and some other factors as well because past performance is not necessarily going to reflect future performance. So here is how most people think expense ratio works:
Fund A has 10% return in the last year and an expense ratio of 1%
Fund B has 11% return in the last year and an expense ratio of 2%
Therefore, these funds perform exactly the same, returning you 9%, right? NO. That's absolutely incorrect. The expense ratio is already INCLUDED in the return. Fund B is the better performing fund. If you had $100 invested in each fund, at the end of the year Fund A has $110 and Fund B has $111.
Expense ratio SHOULD be a big factor when comparing like index funds. If two funds are trying to mimic the performance of an index, the only way one can perform better than the other is to reduce costs. Since most people on these forums promote a strategy of passive investing in index funds, that is why expense ratios matter to them so much. If you're comparing actively managed funds, it's not the most important thing.
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Better not just use the previous year's performance as a measure of a fund's return.
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A lot of people in these forums seem to put an undue amount of weight on expense ratio. Remember, expense ratio is already included when you look at the fund's return. Therefore, the most important figure when comparing two similar funds is the rate of return. Obviously you have to weigh that against the holdings of the fund and some other factors as well because past performance is not necessarily going to reflect future performance. So here is how most people think expense ratio works:
Fund A has 10% return in the last year and an expense ratio of 1%
Fund B has 11% return in the last year and an expense ratio of 2%
Therefore, these funds perform exactly the same, returning you 9%, right? NO. That's absolutely incorrect. The expense ratio is already INCLUDED in the return. Fund B is the better performing fund. If you had $100 invested in each fund, at the end of the year Fund A has $110 and Fund B has $111.
Expense ratio SHOULD be a big factor when comparing like index funds. If two funds are trying to mimic the performance of an index, the only way one can perform better than the other is to reduce costs. Since most people on these forums promote a strategy of passive investing in index funds, that is why expense ratios matter to them so much. If you're comparing actively managed funds, it's not the most important thing.
Definitely didn't realize that. I always thought return and ER would be independent since return is changeable and the expense ratio is not.
Thanks for the replies, everyone. Clearly I do need to compare them more thoroughly and didn't know it or know what to look for. Any advice on how I figure out if a fund is 'closed' to new investors?
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Better not just use the previous year's performance as a measure of a fund's return.
This. Since many of us don't believe those funds may beat the index over time (or it may not be possible to know which ones will), their ratios become extremely important, because when you take into account their likely long term average then subtract off that fee, it's not looking so good. In other words, their long term return after taking into account that fee will not be outperforming, for the vast majority of the funds out there.
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Better not just use the previous year's performance as a measure of a fund's return.
This. Since many of us don't believe those funds may beat the index over time (or it may not be possible to know which ones will), their ratios become extremely important, because when you take into account their likely long term average then subtract off that fee, it's not looking so good. In other words, their long term return after taking into account that fee will not be outperforming, for the vast majority of the funds out there.
Of course these guys are right as well. I am not implying that looking at ONLY the previous year's return is a good way to choose a fund. Funds are required to disclose their 1, 3, 5, 10 year and since inception returns. I just used one year to illustrate my point about how expense ratios are related to return.
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If you accept the argument that no fund will beat the market in the long run, the conclusion is to invest in a fund which aims to equal the market, because that's the best you can hope for. The expense ratio is the relevant comparator between funds which equal the market, since in the long run, the returns should equal each other, except for their expense ratios.
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@trugrit03, arebelspy - frankly, I ignore last year returns and just look at lifetime returns. That is made more interesting for me because target retirement funds for my age are pretty young. Past performance is not future returns, of course, but if you take that too seriously you should assume everything will crash and not invest.
Since my target retirement is young and I don't have a ton of past return information to draw from, I was thinking expense ratio and general company behavior was the easiest thing to optimize. But I see I need to consider the funds inside of it, how they've been doing over the last couple decades, and if I wouldn't be able to invest in those same things with another company.
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The question is whether the 0.78 fee is on top of the ER's of the underlying funds.
Nope, not on top. The fund ER itself is at cost. The .78% is the underlying funds costs. Here is the quote from their website:
* While the fund itself charges no management fee, it will indirectly bear its pro-rata share of the expenses of the
underlying T. Rowe Price funds in which it invests (acquired funds). The acquired funds are expected to bear the
operating expenses of the fund.
That is a good question as I'm not sure the high priced shops have this deal.
Dave
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If that's the case, then the target date fund is really worth examining. Some of the T Rowe Price funds have been solid performers for decades, outperforming their closest indexes and their peers.
And no, I don't accept the argument that no fund will beat the market in the long run. Plenty of them have done it. The market and the companies whose shares are traded in the market do not behave randomly. It's not possible to predict the market, but it is possible to assemble a group of companies that will over time outperform the indexes. Most actively managed funds underperform because most fund companies are lazy and contemptuous of their customers. It's easier and cheaper to hire a marketing department and make deals with your buddies that run 401k plans to sell this crap than it is to find and hire good investment managers and promote a customer centered culture.
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If that's the case, then the target date fund is really worth examining. Some of the T Rowe Price funds have been solid performers for decades, outperforming their closest indexes and their peers.
And no, I don't accept the argument that no fund will beat the market in the long run. Plenty of them have done it. The market and the companies whose shares are traded in the market do not behave randomly. It's not possible to predict the market, but it is possible to assemble a group of companies that will over time outperform the indexes. Most actively managed funds underperform because most fund companies are lazy and contemptuous of their customers. It's easier and cheaper to hire a marketing department and make deals with your buddies that run 401k plans to sell this crap than it is to find and hire good investment managers and promote a customer centered culture.
How do I identify those though?
I mean, I'm a fan of Buffett, so I hold some BRKB, but the problem is even if some funds can outperform the market significantly enough to beat the drag their fees cause, how does one positively ID that?
I'm not confident in my ability to do that, so I'm more than happy taking what I view to be the house side of the odds - index funds with low ERs.
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And as Joshua Kennon and Mr. Buffett both suggest, that is the best way for most people to invest. However, after well over 30 years of investing, my experience has been betting on the best funds run by the best companies gives a superior result over time. You have to pay attention to management changes, such as the loss of Peter Lynch at Magellan, but some funds are consistent outperformers.
Who knows what will happen to Berkshire Hathaway after Warren and Charlie retire? That's the danger zone for most funds and most companies. Astute investing and good stewardship are rare, especially in combination. But they are out there.
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So....T Rowe Price or Vanguard? I'm going to need to make this choice coming up, if I want to rollover my current 401k balance to an IRA from a job switch. Currently I have it split in T Rowe between mid cap growth/value, index fund, and international fund.
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So....T Rowe Price or Vanguard? I'm going to need to make this choice coming up, if I want to rollover my current 401k balance to an IRA from a job switch. Currently I have it split in T Rowe between mid cap growth/value, index fund, and international fund.
Unless things have radically changed you actually don't have to make the choice fast. If you do nothing, your 401K balance will turn into an IRA with T Rowe Price with little work from you. If you decide next month or next year to roll it over to Vanguard, all it will take will be a phone call with Vanguard and they will help you move your money. Rolling over funds is easy.
Most procedural things with investing are made easy by the companies who will profit from your dollars invested with them. The one thing that they make hard is choosing the right fund and keeping up with the details of the expense ratios and other details of the funds. (Because they profit from your ignorance in these matters.) So don't let yourself be railroaded into making the hard decisions fast by the threat of time pressure for the easy ones.
This, by the way, is why so many people urge index funds with low expense ratios. While you won't beat the market, you also have a lot less chance of losing substantial amount of your potential income growth.
BTW, if it were me in your place, my choice would be the Vanguard Index fund with the lowest expense ratio. My Vanguard Index fund has an expense ratio of .02% and it has done quite, quite well for me over the years. It blows the doors off one of my actively managed funds with a higher expense ratio. Hmmmm. <making mental note to roll over Pax World to Vanguard.>