AAII Journal Editor
Top Mutual Funds
Comprehensive information on more than 1,520 funds.
Active Versus Passive
Passive funds are less expensive, but active funds have a role.
AAII Discussion Boards
How much do fees and expenses influence your fund choices?
This week’s AAII Sentiment Survey results:
Bullish: 27.4%, down 0.6 points
Neutral: 26.8%, down 3.2 points
Bearish: 45.8%, up 0.6 points
May 31, 2012
May 24, 2012
May 17, 2012
May 10, 2012
May 3, 2012
April 26, 2012
April 19, 2012
April 12, 2012
April 5, 2012
March 29, 2012
March 22, 2012
March 15, 2012
March 8, 2012
March 1, 2012
February 23, 2012
February 16, 2012
February 9, 2012
February 2, 2012
January 26, 2012
January 19, 2012
January 12, 2012
January 5, 2012
December 29, 2011
December 22, 2011
December 15, 2011
December 8, 2011
November 30, 2011
November 24, 2011
November 17, 2011
November 10, 2011
November 3, 2011
October 27, 2011
October 20, 2011
October 13, 2011
October 6, 2011
September 29, 2011
September 22, 2011
September 15, 2011
September 8, 2011
September 1, 2011
August 25, 2011
August 18, 2011
August 11, 2011
August 4, 2011
July 28, 2011
July 21, 2011
July 14, 2011
July 7, 2011
June 30, 2011
June 23, 2011
June 16, 2011
June 9, 2011
June 2, 2011
May 19, 2011
May 12, 2011
May 05, 2011
April 28, 2011
April 21, 2011
April 14, 2011
April 07, 2011
March 31, 2011
March 24, 2011
March 17, 2011
March 10, 2011
March 03, 2011
This is the amount of money the average American household will pay in 401(k) fees over the course of their lifetime, according to a new study. Demos, a research and advocacy organization, calculated the expenses based on a two-earner household working and saving over a course of 40 years. They determined that out of a hypothetical $509,644 that could have been saved in a hypothetical portfolio with no expenses, $154,794 was lost to fees.
A quick calculation reveals a loss of 30.3% to fees. This is a high percentage, so it bears asking, how did Demos come up with this number? They assumed the couple split their contributions evenly between a stock index fund and a bond index fund, but never rebalanced. Average annual expense ratios based on Investment Company Institute data were used: 0.95% for stocks and 0.72% for bonds. (These are averages for all funds, not index funds, which typically have lower expense ratios than actively managed funds.) Trading costs added an additional 0.95% in annual expenses for the stock fund and 0.50% for bond funds.
Though the charges seem low, less than 2% of invested assets, it is important to realize that the fees and costs apply to the total amount of money held in the portfolio. So, as the size of the portfolio grows, so does the total dollar amount lost to fees and costs. For example, a portfolio that starts out at $10,000 will lose $200 if fees and costs total 2%. If that portfolio grows to $100,000, fees and costs will grow to $2,000 assuming the expense ratio stays unchanged at 2%. In other words, the cumulative dollar amount lost to fees and costs rises in proportion to the size of your portfolio. More importantly, these charges apply regardless if you make or lose money. So what may seem like small annual amounts can cumulate into a very big number.
This is why it is important to keep an eye on charges, both clearly stated (e.g., 12b-1 fees) and not so apparent (trading costs). Every dollar you pay in fees and expenses is a dollar you do not get to keep and earn compound returns on. In terms of mutual funds, every dollar you spend in annual expenses is an extra dollar the manager has to generate in performance just to get you back to breakeven. Thus, if you are paying more for an actively managed fund, you should ensure that you are getting something in return: higher returns, lower volatility or diversification benefits.
The annual fees, 12b-1 fees and loads (charges assessed for buying or selling the fund) will be clearly stated; trading costs will not. You can judge a fund’s trading costs by looking to see how often the portfolio is turned over. The higher the turnover, the higher the trading costs are.
If you are participating in a 401(k) plan, or an equivalent retirement plan, your fund choices will be limited to what your employer makes available. If index funds are not offered, look for the funds with the lowest expense ratios first and see how their performance compares to other funds offered in the plan. Plus, if your employer offers a match, the additional money you will receive from your employer will likely far exceed the extra amount you pay in expenses.
Finally, with all investment expenses, higher fees can be justified if you are receiving adequate value for them. This can be a fund that gets you exposure to investments that are more costly to manage (e.g., emerging market securities), an adviser who keeps you on track to achieve your goals, or tools that help you find good investments. Furthermore, the more complex your personal situation is, the more it will cost to manage it properly.
More on AAII.com
- Top Mutual Funds – Our annual mutual fund guide provides comprehensive information–including return and expense data–on more than 1,500 funds.
- Active Versus Passive: How Do You Choose? – Passive investing (e.g., index funds) will reduce your costs, but active investment strategies also can play a role in your portfolio.
- Fund Statements: What to Look For – Our Investing Classroom has a lesson devoted to helping you make sense of the literature mutual fund companies provide.
- How Much Do Fees and Expenses Influence Your Fund Choices? – Tell us on the AAII Discussion Boards.
The Week Ahead
The only S&P 500 member on the earnings calendar is The Kroger Co. (KR), which will report on Thursday.
The week’s first economic report will be May import and export prices on Tuesday. The May producer price index (PPI) will be published on Wednesday and the May Consumer Price Index (CPI) on Thursday. Friday will feature the Empire State manufacturing survey, May industrial production and capacity utilization, and the preliminary University of Michigan consumer sentiment survey.
The Treasury Department will auction $30 billion of three-month bills and $27 billion of six-month bills on Monday, $32 billion of three-year notes on Tuesday, $21 billion of 10-year notes on Wednesday, and $13 billion of 30-year bonds on Thursday.
No Federal Reserve officials are currently scheduled to speak.
AAII Sentiment Survey
Bearish sentiment continued to spread among individual investors to an unusually high level, while bullish sentiment deteriorated in the latest AAII Sentiment Survey.
Bullish sentiment, expectations that stock prices will rise over the next six months, fell 0.6 percentage points to 27.4%. This is the tenth consecutive week that optimism has been below its historical average of 39%. The current bullish sentiment reading is more than one standard deviation below the long-term average.
Neutral sentiment, expectations that stock prices will stay essentially unchanged, declined 3.2% to 26.8%. This is the fourth consecutive week that neutral sentiment has been below its historical average of 31%. It is the lowest neutral reading since December 15, 2011.
Bearish sentiment, expectations that stock prices will fall over the next six months, rose 3.8 percentage points to 45.8%. This is the eighth time in the past nine weeks that pessimism has been above its historical average of 30%. It is the second week in row that bearish sentiment exceeded the long-term average by more than one standard deviation.
The spread between bullish and bearish sentiment, the bull-bear spread, widened to -18.4 percentage points. This is the fourth negative double-digit spread in the past five weeks.
This week’s special question asked AAII members if they have become more aggressive in their investing, are investing more conservatively, or stayed at about the same risk level relative their investing profile six months ago.
Just over half of our members (51%) indicated that they were taking on less risk, investing more conservatively than six months ago. These investors are concerned about the potential of a stalling U.S. economy, the risk of a budget showdown and sequestration during an election year, and the European financial crisis and its impact on our markets and economy.
One-third of our respondents (33%) noted that they were taking on about the same amount of risk with their portfolio as they did six month ago. Many of these investors felt confident in their financial plan and are sticking with their asset allocation.
Only 16% of the respondents in the survey indicated that they were taking on more risk and investing more aggressively today compared to six month ago. These investors feel that stocks offer the best opportunity today, with an environment of low interest rates. They are buying good-quality companies as share prices decline. They are looking for bargains now that stocks are on sale. One member even quoted Baron Rothschild, who said that you should “Buy when there is blood in the streets.”
Here is a sampling of the responses:
- “Less risk for now. Nothing is going to get resolved in D.C. until the election. The risk of a short-term budget showdown in a lame duck Congress is too great.”
- “Extremely more conservative: Europe is about to blow, the U.S. economy is about to stall, the market is sending out bearish signals.”
- “Less risk for the summer. Market will likely enter bear territory in the summer before reversing and finishing the year higher.”
- “A slow and steady investment in good companies has worked well enough, no need to change.”
- “I’m sticking to my asset allocation model.”
- “As a long-term investor, I continue to buy common stocks on dips in the market.”
AAII Asset Allocation Survey
May Asset Allocation Survey results:
59.7%, down 0.9 points
20.9%, up 2.1 points
19.4%, down 1.3 points
Asset Allocation details:
30.3%, up 1.6 points
29.4%, down 2.4 points
5.2%, up 1.5 points
15.6%, up 0.6 points
Fixed-income allocations rose to a three-month high as equity and cash allocations declined in the May AAII Asset Allocation Survey.
Allocations to stocks and stock funds fell 0.9 percentage points to 59.7%, a three-month low and below the historical average of 60%. Equity allocations have fluctuated in a 1.8 percentage-point range throughout 2012.
Bond and bond fund allocations rose 2.1 percentage points to 20.9%, the highest since February 2012. This is also the 35th consecutive month that fixed-income allocations have been above their historical average of 16%.
Cash allocations fell by 1.3 percentage points to 19.4%, a three-month low. This is the sixth consecutive month that cash allocations have been below their historical average of 24%.
Even though pessimism about the short-term direction of stock prices was at an unusually high level throughout most of May, stock and stock fund allocations did not fall significantly. Low yields on money market accounts, concerns about the impact a future rise in interest rates will have on bond prices and a preference for dividend-paying stocks were all reasons why. At the same time, many individual investors are using capital preservation strategies for a portion of their portfolios even as they remain frustrated with the low yields offered by bonds and money market accounts.
This month’s special question asked AAII members about their bond maturities. Specifically, we asked if they are holding short-, intermediate- or long-term bonds and bond funds. The majority of respondents said they were holding a mix of maturities, primarily short-term and intermediate-term. Intermediate-term bonds and bond funds were held by the largest number of members, followed by short-term bonds and long-term bonds. The rationale among many was a concern that interest rates would rise in the future, hurting the value of long-term bonds. Those who held long-term bonds cited the higher yield as their reason for doing so.
Here is a sampling of the responses:
- “Mostly short- and intermediate-term bonds; when interest rates go up, the value of long-term bonds will be hit the hardest.”
- “I’m holding intermediate- and long-term bonds that were purchased when interest rates were higher.”
- “I am in short-term bond funds. The reward of long-term bonds is not enough to offset my fear of the day the Federal Reserve quits suppressing rates.”
- “Intermediate-term. This maturity level carries significantly higher yields than short-term bonds. It also avoids the high volatility of long-term bonds.”
- “Long-term bonds. Until there is some indication that interest rates will go up, I want to maximize yield.”
- “Short-term bonds. Long-term bond yields have to go up; it’s just a matter of when.”
Wishing you prosperity,
Charles Rotblut, CFA
AAII Journal Editor