Managed investments as a whole, before fees = index funds, before fees. That’s what an index is, a measure of all the actively traded investments. You cannot use different returns to compare the same markets. Active management and indexing are not different markets, just different strategies. In the end, the performance of managed funds, before fees equals the performance of index funds, before fees.

This model assumes that the index and fund held the same positions….therefore the managed fund would cost more and therefore generate a smaller return %.

Check out my comments in comment #15. FINRA also has a mutual fund comparison calculator called the FINRA Mutual fund expense analyzer, it’s not bad but IMO personalfund.com is far more comprehensive.

The Kiplinger Fund Finder is also a pretty cool online tool that allows you to pre-screen mutual funds. Enter the criteria that’s most important to you and it returns the funds that match your tastes.

This ‘fund finder’is effective when looking for cost efficient actively managed mutual funds.

If you are investing in taxable accounts the ETF route is the best way to invest as well. You will almost never get a taxable distribution and will pay long term capital gains taxes. You can get almost complete tax deferral for your whole investing career.

For a hypothetical portfolio of:
40% International (VEU)
45% Domestic (VTI)
5% Emerging Markets (VWO)
10% Total Bond Market (BND)

The composite (weighted average) expense ratio would be 0.155% which is about half the expense ratio of even the index funds!

Index funds are the next best option IMHO. Actively managed funds are over priced, if you want active management buy BRK.B shares!

This is the ETF strategy I’d love to use once I’ve got enough money to make lump sum deposits (for now I’m limited to $100 deposits per paycheck).

Thanks.

Don’t get me wrong, expenses matter… a lot. But at the end of the day, roughly 94% of performance is delivered by your asset allocation, not the specific investments you use.

So whatever else you do, be sure to start with the appropriate stock/bond/real estate/commodity, domestic/international mix. THEN, worry about what specific vehicles you use to build your portfolio (with cost being an important factor, of course).

Again, nice job here, Dylan. A few hundred words is scant space to develop an idea like this.

I own (and am very happy with) CGMFX. However, although your numbers are compelling, it needs to be said that all of the time periods you address were during a bull market (the recovery from the dot-com bust having started in late 2002-early 2003, depending on what you’re looking at). Basically your numbers don’t reflect how well the fund does in a bear market, which we may be entering.

Ken Heebner makes big bets on a very limited number of funds and as such, can be extremely volatile. When he wins, he can win big. But it cuts both ways. He can also lose big. Looking at the numbers today, CGMFX is down 12.40% YTD, while the Vanguard Total Stock Market Index (VTSMX) is down 9.36% If this is indicative of a pattern, the next few years might not bode so well for CGMFX.

Also note that with an annual turnover of 250-500%, you get whacked very hard in the tax department. Considering how much of those gains are short-term gains (which are taxed at income rate), you can lose close to half of your gains to the tax man if you live in a state with a high income tax.

Don’t get me wrong. I’m not knocking CGMFX. As stated, I own it myself, and am pleased. But you’re fooling yourself if you think that you aren’t courting a large amount of risk for the gains you’ve achieved so far.

It seems people need to make good decisions for their retirement to get a bit better result.

However, if you review the returns over the last few years and compare them to say VFINX (Vanguard 500 Index) with an 0.18 expense ratio and a 1.19 yield, your returns over a 5 year period are as follows:

2004 2005 2006 2007 ytd
__________________________________________
CGMFX 12.4 25.3 14.9 80.0 -8.1
VFINX 10.7 4.8 15.6 5.4 -6.0

The Growth of $10K over this period between CGMFX and VINFX would be approximately $26K -vs- $13K. The fees would make a negligable difference. Clearly if you were dropping $20K per yer into each fund, then CGMFX would **far** outstrip the Vanguard fund.

In fact, beginning with $20K and depositing $20K per year in CGMFX would yield approximately (I just spit out the numbers using Microcalc without checking for typos) $210,505.58 over this period, whereas with VINFX, the return for the same would be $99,258.33. (Less expenses of course…). I’m no genius, but one number sure looks bigger than the other!!!

I’m not saying that you should disregard the author’s article, but I do think you should take any point of view (including this one) with a dash of Yankee cynicism. And I do need to clarify that Heebner sure has been on a roll over the last several years.

It’s free to use and a great way to see the dramatic effects of expenses and internal fees on your investments over any significant period of time.

Personalfund.com

As you have shown, fees are too large of a factor for people to naively dismiss.

–vh

Thanks,

tracy Ho
wisdomgettingloaded

First, yes, there are mutual funds that out perform a comparable index for specific periods of time; however, the longer the time frame, the fewer the number of actively managed funds doing so. And the real problem is in the chances choosing these funds before they outperform (anyone can pick the winning horse after the race is over). This example is based on 25 years of accumulation and an unknown length of time for withdrawals.

I took neutral positions as to whether actively managed funds will outperform or under perform. This is because all of the active management in the market is *The Market*, so if active management as a whole is doing X%, well, then the market (and index funds) must be doing just as well.

The bottom line is that it would not be prudent to use a higher withdrawal rate, banking on the possibility that you can chose funds that will consistently beat the market. If you’re wrong, you run out of money.

Second, and also in response to Brian B., if we assume zero load, the withdrawal amount increases by $2,257 to become $39,252 per year, which is still over $10,000 less than the index funds. So, depending on breakpoints, withdrawals would be something between $36,995 and $39,252.

I did not use breakpoints to keep it simple. If this were a real portfolio of funds, breakpoints would depend on how many different fund families were used and how much money went to each. Also, the annual expense plays a much larger roll in the outcome than the load. For example, a zero load and 0.88% expense (0.13% higher) will result in a similar withdrawal amount. So, with some breakpoints, an expense between 0.75% and 0.88% would have a similar result.

There are a number of details I could have included; however, my goal was to create an example that most people could relate to without drowning them in numbers.

In a tax-advantaged account (401k, IRA, etc), there would not be an additional tax advantage to the index funds. The tax advantages of low-turnover funds and ETFs really come into play in non-qualified accounts.

This story is compelling, but not quite as accurate as portrayed. 2 assumptions skew the results directly toward index funds:

1) The underlying investments return 7% each year.

2) Additionally, each $20,000 contribution to the actively managed funds has a 5.75% front-end load sales charge.

Now, I am in the A-share, front-end load (but with low expenses!) support crowd (for full disclosure). A look at the most recent Barron’s will show a number of mutual funds that have outperformed various indicies over x amount of time. Sure, that’s not the case with all funds, and a good number of them stink, but choosing the right one makes #1 a tough assumption to make.

The second assumption, in most cases, is just flat out wrong. All the front-load companies I work with offer Rights of Accumulation and Breakpoints - lowering the fee based on total assets accumulated. Once an investor hits, for instance, $50,000 the front-end load goes down to 5%. Corresponding breakpoints happen at certain intervals, usually 25,50,100,250,500k and 1 million. This siginificantly lowers the front-end load (to sometimes 1% or less).

Sure, you’re still paying a load vs. a no-load, but the gap in the difference now becomes much smaller, wouldn’t you agree? I’d be interested in an analysis using breakpoints. Factor in the possibility of beating the index (which most don’t, but some do), and it sounds again like we’re comparing apples to kiwis. Can’t both be tasty?

This is a pretty long-standing argument, and there are definitely ups and downs to both sides. Each type of fund caters to a different type of investor. Read your prospectus. All that jazz. Just playing devil’s advocate! I love this blog and what you’ve done and am happy to contribute thoughtful conversation to it as best I can.

Thanks!

To be completely fair, though, I think you need to account for sales charge break points on the loaded fund. The fact that they can be reduced as an account balance grows has a big impact on the bottom line.

The no-load, low-cost fund should still come out on top assuming equal investment returns, but the “real life” margin of victory is a bit smaller.