Study finds that low fees are best indicator of mutual fund performance | Hacker News Reader

Study finds that low fees are best indicator of mutual fund performance

nytimes.com

35 pointsryanwaggoner13 comments

Makes sense, though it's probably a correlation to the root source of outperformance, which is being an index fund. Cheaper funds tend to be index funds, index funds tend to outperform, thus cheaper funds end up outperforming more expensive (usually more actively managed) funds. One of the seminal studies on this is http://www.firstquadrant.com/downloads/How_Well_Have_Taxable...

What's more, the more expensive (again usually actively managed) funds tend to have high turnover, and turnover implies a huge tax penalty for taxable investors in taxable accounts. So if anything, the winnings of lower-fee index funds are understated, as turnover-generated tax hits are not disclosed well.

I agree with the author completely - hopefully more disclosure, legislated, would entice more people to shop for lower-fee funds.

(Full disclosure, I run a startup that's based on helping people do index investing, so I might be biased ;p)

So what do you think of ETF's? From what little I've read, that seems like a pretty good way of doing index investing.

They're good - gotta watch out for your effective expense ratio, which is the amount of commission you pay for the trade (depends on your brokerage house and the ETF) divided by the years you plan to own it, added to the ETF's own existing expense ratio. So net net, buy in larger chunks, or find one of the no-commission-ETF houses.

Also, and it sounds like you are, you need to be familiar / comfortable with limit orders or market orders. That sometimes can scare folks who are used to not-very-time-sensitive daily-priced mutual funds.

Actually I don't know much at all about investing. I know what a stop loss order is, but I don't think I'd know how to use one effectively.

You probably won't need it, unless you're doing something significantly more complex than the fundamental buy-and-hold index investing strategy.

I'd just use market orders all the time except I'm a little freaked out about momentary (on the order of minutes) market freak-outs as happened a couple months ago. Limit orders priced at the current price (or 1 cent higher) is pretty much just my way of enforcing a sane market order.

Stop limit orders are a good way to determine when to sell, which is the toughest decision to make. Even if you are dollar cost averaging into a position, you can set a limit order to protect profits, or prevent a large loss. I've seen some recommendations to put a stop limit order of a certain percentage on any new position for stocks/ETFs as a way to keep emotion out of your decision. A trailing stop limit order allows you to sell only when a stock/ETF goes down.

You should probably read this:

http://www.businessweek.com/magazine/content/10_31/b41890509...

It's about commodity ETFs so maybe index fund or other ETFs don't have the same problem, but the message I got out of it is that there are plenty of unknown unknowns here.

> "I make a living off the dumb money," says Emil van Essen, founder of an eponymous commodity trading company in Chicago. Van Essen developed software that predicts and profits from pre-rolling. "These index funds get eaten alive by people like me," he says.

Yeah, that sort of thing is what scares me about investing. I don't want to do it full-time, but it looks like there are tons of smart people out there who do make it their job, and are out to get you.

Bogleheads have known this for thirty years now. Buy index funds, people. Defaulting to Fidelity & etc 2 percent fee funds, like many do in their 401ks, will cost you literally millions over your lifetime.

Sigh... so true. I only wish the economics were different. If, like Fidelity, you extract a ton in fees it allows you to swamp the airwaves with marketing dollars. And the folks who just keep their heads down and do their jobs, well, don't have as much money to run ads. And in this market, unfortunately, because few people understand it deeply ad dollars can move the needle. Unfortunate, to say the least.

This is not even considering the who commissioned-advisor problem.

On the Predictably Irrational blog there was an example of how clients recommended Fidelity and Vanguard evenly picked Fidelity on the basis of 25k bonus airline miles (cash value $250) so that they could pay $2~20k extra a year in management fees. I wanted to cry... And figure out how to offer airline miles.

It's because the fees charged don't appear as a line item on your statement. It's probably the only thing most American families spend more than a $1000 a year on (I did the math), for which they get no documentation... not even a receipt.

Can you imagine how different the world would be (and how much less Fidelity would make) if you had to pay fees out of pocket? A single piece of simple legislation that disallows silently deducting fees from your assets would be all it takes.

My co-founder and I sometimes sit at dinner thinking that if we do nothing else for the world but make fees (both expense ratio and more subtle ones like turnover-induced tax hit) more tangible, then we'll have succeeded.

Good point.

However, there are two even bigger line items that American families spend more than $1000 a year on without any documentation or receipt.

Payroll taxes: the amount you see on your paystubs for social security and medicare taxes is actually only half the amount that you pay. The other half is hidden from your eyes under the guise of an "employer contribution" which is a bit of accounting terminology which roughly translates to: straight up bullshit. Employers have no choice but to pay the taxes, on their side it is a cost of maintaining you as an employee, it is thus logically a part of your earnings that you never see on any documentation (imagine if all of your taxes were hidden from you similarly). Self-employed workers have to pay the full 15.3%.

And, medical insurance dues. Again employers hide about 2/3 of medical insurance costs from employees by pretending that an "employer contribution" to employee health insurance payments isn't a part of the employee's salary. Clearly it is and it's shameful that people don't appreciate how much they are truly paying for their health insurance plans. The reason this practice exists is due to wage controls put in place during WWII, in order for companies to attract good employees they had to figure out ways of offering compensation that didn't appear on IRS documentation, so employer paid health insurance became popular.

An American family with insurance through their employer earning the median US income (~50k) pays $3800 in payroll taxes and about $2000 in health insurance contributions every year ($178k over a 30 year career) without ever seeing a line item, a summary, or any scrap of documentation.

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