Dave Ramsey article I wrote


J

JoeTaxpayer

I recently wrote an article
http://www.joetaxpayer.com/davids-biggest-mistake/ in which I quote Dave
as writing that "The biggest mistake people make is putting too much
emphasis on expenses as a criterion."

He goes on to suggest that if his fund returns 16%, but has a .5% fee,
he is well ahead of my 9% fund with a lower fee.

I'm amazed at how The David can continue to make such assertions, and
suggest that one can expect returns well above realized returns of the
last century without getting called on the carpet in a bigger way.
Respectfully, it seems he formed his opinions in the late 90's
pre-crash, and used the prior two decades to formulate an investing
strategy. To be fair, the great Peter Lynch was guilty of the same
offense, proposing a 'safe' 7% withdrawal rate.

On a light note, my 401(k) provider just advised that our S&P fund is
now Vanguard's VIIIX which sports a .02% expense. Less than 1% in a half
century, compared to the average 1% per year. $200 per million vs
$10,000. I should ignore these expenses?
 
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D

David S Meyers CFP

I recently wrote an article
http://www.joetaxpayer.com/davids-biggest-mistake/ in which I quote
Dave as writing that "The biggest mistake people make is putting too
much emphasis on expenses as a criterion."

He goes on to suggest that if his fund returns 16%, but has a .5% fee,
he is well ahead of my 9% fund with a lower fee.
He's almost certainly comparing apples and oranges. It happens. A lot.

Are the two funds in question invested in the same asset classes? Do
they have the same levels of risk?

Once you account for those things, you may start talking about
comparing. And talk about comparing over the long-term. I sincerely
doubt he's doing that.

I cannot stress enough to clients how important expenses are. Neither,
apparently, can Morningstar:


Naturally, there are some issues which make comparisons difficult. An
actively managed fund which doesn't maintain a relatively steady
exposure to a given asset allocation is a difficult thing to compare
against a simple combination of index funds, though the history of
market-timing and asset-class rotations doesn't really speak well of
the ability of active asset-class management adding much value, either.
If you look at most of those types of funds over the long run and
compare them to an index-fund strategy built out of the average asset
allocation over time for such funds, I'd be very suprised to see such
active management really winning, either. But it's still a more
complex and difficult comparison to make than, say, simply comparing an
actively-managed large-cap US stock fund against, say, SPY or VOO (or,
especially, VINIX, the institutional version of the Vanguard index,
with 0.04% expenses, or, if you're in a particularly large retirement
plan, the other share class of that same fund which has the amazing
0.02% expenses).

If I had a nickel for every time someone compared apples and oranges,
well, let's just say I'd be able to buy a hell of a lot of apples and
oranges…

Thanks for posting the article. It's a huge topic and one for which
there's a hell of a lot of misleading (and often self-serving)
information out there from folks who are supposedly experts.


--
David S. Meyers, CFP®
http://www.MeyersMoney.com
disclaimer: discussions in misc.invest.financial-plan are for
educational purposes only and should not be construed as financial
advice. For personal financial advice, please consult directly with a
professional.
 
D

dumbstruck

as writing that "The biggest mistake people make is putting too much
emphasis on expenses as a criterion."
I agree that high regular yearly expenses are subversive to returns.
However my biggest mistake has been avoiding liquidation expenses
for a sick investment, such as fund penalties or selling commissions.
Also regret holding dying investments to make the 1 year cap gain rate.
 
J

JoeTaxpayer

I agree that high regular yearly expenses are subversive to returns.
However my biggest mistake has been avoiding liquidation expenses
for a sick investment, such as fund penalties or selling commissions.
Also regret holding dying investments to make the 1 year cap gain rate.
Thus my warning "Don't let the tax tail wag the investing dog." It's too
easy and too common to see your gain drop by more than the amount you'll
save waiting for LT gain rates to kick in.
 
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D

David S Meyers CFP

Naturally, there are some issues which make comparisons difficult. An
actively managed fund which doesn't maintain a relatively steady
exposure to a given asset allocation is a difficult thing to compare
against a simple combination of index funds, though the history of
market-timing and asset-class rotations doesn't really speak well of
the ability of active asset-class management adding much value, either.
Followup to myself:
If you look at most of those types of funds over the long run and
compare them to an index-fund strategy built out of the average asset
allocation over time for such funds, I'd be very suprised to see such
active management really winning, either.
In a recent WSJ article (9/20/2013):


Of course isn't purely about expenses - though there's no question that the
comparison -- against a 60/40 index -- only works if the index is purchased
at very low expense. (okay, it works in this particular case, since the
benchmarks beat the funds by huge margins, even with high expenses).

Whether Morningstar's comparisons really make sense deep under the hood, I
don't know. I haven't dug into their research. But the numbers above do
make a lot of sense.



--
David S. Meyers, CFP®
http://www.MeyersMoney.com
disclaimer: discussions in misc.invest.financial-plan are for
educational purposes only and should not be construed as financial
advice. For personal financial advice, please consult directly with a
professional.
 

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