Author Topic: Ditch American Funds for Vanguard?  (Read 29173 times)

FloridaStache

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Ditch American Funds for Vanguard?
« on: August 18, 2013, 02:25:10 PM »
Hi all- I'm interested in thoughts from the community here. I currently have much of my retirement savings (both a traditional and Roth IRA) as well as two 529 plans in American Funds managed by an advisor. I am ashamed to say that after several discussions with the advisor, I still don't have a clear understanding of why I'm invested in the particular funds that I am, or why it is necessary for me to be in 8 different funds that seem to favor redundant asset classes, etc.  the answer I get from the advisor is basically "they are great funds and consistently outperform the S&P index. Of course, he sells those funds, so he thinks they are great, and I can't argue with the very nice returns I've gotten over the past 10 years that I've held them.

But I'm increasingly uncomfortable with the fact that I don't really understand the strategy behind the investing. I've basically handed my life savings to a guy that I've never met and said "do good things."

However, I DO understand the philosophy behind index investing, so I am considering pulling all of this out of American Funds and getting into Vanguard. With VG I would hold only 3-4 funds (one per asset class) and practice basic asset allocation fundamentals, something I can't do today because the American Funds are such a mystery to me.  Oh yeah, the fees are slightly, but not ridiculously, higher, too.

So, what should I do- move to VG and take control of my investing, or stick with American Funds and my adviser, enjoying nice returns but basically trusting him to make the right calls?

P.S. I've researched my funds and I would not have to pay any deferred loads to get out.

matchewed

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Re: Ditch American Funds for Vanguard?
« Reply #1 on: August 18, 2013, 03:23:26 PM »
The general consensus from this crowd will be to pull the trigger and move to Vanguard. Without any specifics it is hard to tell but more than likely the fee difference is enough to eat away at the performance, plus there is no guarantee the fund managers can maintain that performance.

Another Reader

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Re: Ditch American Funds for Vanguard?
« Reply #2 on: August 18, 2013, 03:47:47 PM »
You should be able to look up the American funds by their symbol and learn what they hold and how much they cost.  Many of them are likely to be actively managed, but you can read the Morningstar summary about each one to understand the underlying investment strategy.  Your advisor may be charging you a sales commission when you buy (front end load) or possibly you have a class of shares with a higher expense ratio.  Possibly, you are paying the advisor an asset management fee annually that is a percentage of your assets.

Vanguard is a good option that will reduce your expenses.  If you prefer someone with local bricks and mortar offices, Fidelity offers a menu of very low cost index funds (look for the Spartan name) and a place where you can attend investing seminars, talk to a representative in person, or just "visit your money."  As funds, some of the American funds are not bad, so you may want to transfer the existing funds over while you do more research.  Get Vanguard or Fidelity to initiate the transfers.  You can then decide how you want to allocate the money.

To determine how well the American funds are doing, look at the Morningstar write up.  Look at the hypothetical growth of $10,000 chart and the rankings of the various funds.  The Fidelity and Schwab websites have fund comparison tools that I have used.  Compare the performance of your current funds to the Vanguard or Fidelity funds you are considering.  Occasionally, actively managed funds will perform better than index funds, often they won't.  The visual comparison can be very helpful.

FloridaStache

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Re: Ditch American Funds for Vanguard?
« Reply #3 on: August 18, 2013, 05:08:40 PM »
Thanks, all-

Additional data- almost all the shares I own are Class A shares, so there would be front-end loads if I were to purchase more (which I do not intend to do any time soon as this is just my IRA that I use to roll over successive 401(k) plans after job changes.  I unknowingly (as yet not having learned the ways of the Mustache) got socked with $1400 in front end loads in 2010 this way.  However, these shares do not have back-end loads were I to sell and go to Vanguard.

Annual fees are $10x4 (trad IRA, Roth, 529 each for 2 kids).  Expense ratios are anywhere from 0.46%-1.5%.

Another Reader- I have researched them in detail and they are all either blue chip US or International Stocks- in other words, aggressive, which is fine at my age (35) but I feel like I'd rather be in funds like VTSAX/VTIAX to catch the index effect and reduce fees vs. actively managed funds.  Still, after getting decent returns (7.22% annualized over last 10 years ) I'm afraid to mess with it. 


Almost Retired

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Re: Ditch American Funds for Vanguard?
« Reply #4 on: August 18, 2013, 06:16:23 PM »
I am doing the same thing.  Moving everything I have to 3 Vanguard index funds.  The best book to read for understand the great advantages of a no load, no or very low fees is by John Bogle - The Little Book of Common Sense Investing.. Also join the Bogleheads at  http://www.bogleheads.org They have a very nice wiki too   http://www.bogleheads.org/wiki/Main_Page

Bogle started Vanguard and has written extensively on the common sense of no manager, very low costs and long term investing.  While I will be retired in 2 years it is never too late to make a move like this.  Investing this way is so simple and beats the smarts guys year after year.

Tim

Carrie

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Re: Ditch American Funds for Vanguard?
« Reply #5 on: August 18, 2013, 06:48:39 PM »
I still have some American Funds that I'm holding onto -- I've already paid the front end load, and they are doing so well I don't want to sell right now.  What I've decided to do for now is keep them (without further contributions) and now I'm investing all available money into Vanguard funds.  So far I've got some STAR and Total Stock Market Index (and an ESA in a target retirement fund).  I know I need to add some international & bonds, but we've got some of that through the 401k.

I'm trying to get my mind wrapped around the investment and allocation thing; I know we've got way too many funds in too many places for the amount of money we have invested; but I feel like there are a lot worse places to have money than in the handsomely performing American Funds we currently own.

FloridaStache

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Re: Ditch American Funds for Vanguard?
« Reply #6 on: August 18, 2013, 07:00:21 PM »
Carrie, I have been thinking along exactly those same lines- I already paid the load and the funds are performing well, so I might as well hold them for now but invest future dollars in Vanguard funds- that is the only line of thinking that has me still sitting on the fence and not just jumping to VG.  Glad to see I'm not the only one!

VasyaPupkin

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Re: Ditch American Funds for Vanguard?
« Reply #7 on: August 20, 2013, 08:11:52 PM »
Same deal here- we have two IRAs rolled over and two active Roth with American. It is true that the front fees have been paid, but there is also the effect higher fees have on the growth over tens of years. You'd effectively change the slope of the curve even with such relatively low 0.5% or so fees versus 0.05% that Vanguard charges. I too am on the fence though- moving everything to Vanguard is a bit too much like putting it all into one basket. I may consider moving the Roth's, just to avoid the front load "haircut"


GreenGuava

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Re: Ditch American Funds for Vanguard?
« Reply #8 on: August 20, 2013, 11:16:30 PM »
Another Reader- I have researched them in detail and they are all either blue chip US or International Stocks- in other words, aggressive, which is fine at my age (35) but I feel like I'd rather be in funds like VTSAX/VTIAX to catch the index effect and reduce fees vs. actively managed funds.  Still, after getting decent returns (7.22% annualized over last 10 years ) I'm afraid to mess with it.

So, no bonds?  I think no bonds at age 35 - no matter what age you want to retire - is reckless, and I'm seeing more and more commission advisors calling for it lately.  The difference in expected gains of 100% stocks vs 80% stocks (with 20% bonds) is so minimal, it's just not worth the increased volatility - not to mention the huge opportunity cost in event of a big drop.

BTW, 7.22% annualized for ten years sounds nice in a vacuum - it's certainly nicer than what you'd get in a savings account.  But the U.S. stock market has returned 8.38% annualized over that same time period.

My suggestion:  call Vanguard, set up an account, and get them to make a pull order to get the accounts over to them.  Don't let there be a "misinterpretation" on the part of your advisor that would let him or her grab another 5% load by "oh, I thought you wanted me to move the money into $fund."

If you want, post what the dollar amounts per account are, along with what's available in your 401(k) at work, and we can help you set up your new total portfolio if this is going to be your first time doing it alone.

FloridaStache

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Re: Ditch American Funds for Vanguard?
« Reply #9 on: August 21, 2013, 02:47:12 AM »
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So, no bonds?  I think no bonds at age 35 - no matter what age you want to retire - is reckless, and I'm seeing more and more commission advisors calling for it lately.  The difference in expected gains of 100% stocks vs 80% stocks (with 20% bonds) is so minimal, it's just not worth the increased volatility - not to mention the huge opportunity cost in event of a big drop.

This is EXACTLY what I said to my advisor last week- and he scoffed and hand-waved at bonds, said they weren't worth it. "Yeah, well right NOW, I thought, but what about when the market turns someday and there's no hedge?" He was pushing me to go more into large-sector international, which to me is pretty highly correlated with large-sector US, but again, hand-waving.  I wasn't comfortable with this advice, but when I compare the performance of the American Funds that I am in vs. a comparable Vanguard fund, say, VTSAX, I find that in many cases the American Fund has indeed outperformed the VG fund to a degree, but I'm not sure how this stacks up when accounting for the impact of fees.

Here is my American Funds IRA portfolio today:

AMCPX$20,355
AWSHX$15,863
CWGIX$13,986
AEPGX$10,436
NEWFX$9,063
WSHBX$6,551
SMCWX$5,838
AMPBX$3,005

MY 401(K) is through Fidelity and I have:

$51K in a target 2040 lifecycle fund
A little over $1K each in a growth fund, equity income fund, and international fund.

I also have $33K in a Capital One online savings account for a cash position.  Much of this is earmarked for retiring some student loans, a portion will be held for an "emergency fund" so I don't consider any of this available to invest right now.

I was thinking of moving the IRA into a relatively straightforward Vanguard portfolio of:

VTSAX60%
VTIAX20%
VBTLX10% (deflation hedge)
VSGLX10% (inflation hedge)

Suggestions welcome!


bUU

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Re: Ditch American Funds for Vanguard?
« Reply #10 on: August 21, 2013, 04:04:32 AM »
This is EXACTLY what I said to my advisor last week- and he scoffed and hand-waved at bonds, said they weren't worth it. "Yeah, well right NOW, I thought, but what about when the market turns someday and there's no hedge?"
Not that I'm advocating a no-bonds strategy, but there is no guarantee that bonds will provide any hedge against the market turning someday, this time around. There are some signs that bonds simply aren't going to play the role they once did - indications that bonds are back to playing the role they played in the mid-1950s.

I personally have moved a small amount of my bond exposure into floating-rate bonds, but I think that's a pointless gesture as well. I don't think there really is going to be any hedge anymore. There's going to be volatility at every turn, except for investments that pay less than the rate of inflation.

He was pushing me to go more into large-sector international, which to me is pretty highly correlated with large-sector US, but again, hand-waving.
It is definitely alchemy, though there is some reason to believe that American economic strength is being spread around the ever-increasing-in-size developed world.

I wasn't comfortable with this advice, but when I compare the performance of the American Funds that I am in vs. a comparable Vanguard fund, say, VTSAX, I find that in many cases the American Fund has indeed outperformed the VG fund to a degree, but I'm not sure how this stacks up when accounting for the impact of fees.
Most of the comparisons account for the fees. AMCPX seems to do a little better than VTSAX, and it does so by taking a few more risks than are implicit in VTSAX. By contrast AWSHX seems to do a little worse than VTSAX - no surprise, it takes a bit less risk. You're not going to see an overwhelming impact of a difference of 0.6% in fees in any short period. It is only over the long-run that that fee eats away at any advantage the managed fund may have. The difficulty here is that these two funds, AMCPX and AWSHX, are actually rather good funds. If they were crappier funds, the impact of the fees would perhaps be more apparent.

CWGIX, of course, needs a different comparison, VTIAX perhaps. And when we start digging into this, we hit on my big problem with index funds: In the international arena, I don't think all of Jack Bogle's theories pan out, at least not yet. Maybe it is because there is less of an efficient marketplace internationally or some such. Whatever it is, I have chosen to invest domestically in index funds, and internationally in actively-managed funds. I prefer Artisan but CWGIX is good too.

I think with AEPGX you begin to go off the rails a bit: You're getting sector-specific (with probably no good reason, especially since you're in CWGIX). It is one thing to acknowledge that an international equities index fund may not be the right way to gain international exposure, but there's no good reason to get sector-specific, I feel. And I think similar concerns can be expressed with regard to some of the other funds you have there.

The other weirdness in my portfolio is that I also don't like bond index funds, for reasons probably similar to why your financial adviser is waving you off of bonds overall. While I don't agree with the adviser's recommendation, the caution I think is warranted, and for that reason I want most of the decisions about which specific fixed-income assets I'm invested in put into the hands of an expert, so most of bonds exposure is now coming from VWENX.

nofool

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Re: Ditch American Funds for Vanguard?
« Reply #11 on: August 21, 2013, 09:45:00 AM »
I used to work for a CFP that pretty much exclusively used AF. AF has great customer service, and lower expense fees for actively managed funds, but the front loads (for A shares) and back loads (for B shares? I think) really kill the deal. That's how the advisors make their money.

The only reason why I still have some money with AF is because I can invest at NAV (no sales charge) for life.

FloridaStache

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Re: Ditch American Funds for Vanguard?
« Reply #12 on: August 21, 2013, 10:10:51 AM »
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the front loads (for A shares) and back loads (for B shares? I think) really kill the deal.

Yes, yes they do.  I about fell out of my chair when I saw the loads I took for my A shares when I rolled over my last 401(k).  Of course, at the time, I thought "well, that's just the way it goes."  Wrong.

So what does everyone think of my proposed Vanguard portfolio allocation (listed in my previous post in this thread?  I'd love some suggestions.

beltim

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Re: Ditch American Funds for Vanguard?
« Reply #13 on: August 22, 2013, 12:13:15 PM »
VSGLX  isn't a valid ticker, so I can't provide any advice on that. 

And I agree with bUU on bond index funds - I don't like them, because there's no way to "hold to maturity" and guarantee making (a small amount of) money over any particular time period.  I much prefer individual bonds.  And if you don't have enough money to invest in individual bonds, I think you're likely to do as well just holding that portion in cash, and rebalancing as appropriate.

CB

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Re: Ditch American Funds for Vanguard?
« Reply #14 on: August 22, 2013, 02:27:48 PM »
VSGLX  isn't a valid ticker, so I can't provide any advice on that. 

I'm guessing it's meant to be VGSLX, the Vanguard REIT fund.