Wednesday, November 2, 2011

Why You Should Avoid High Cost Funds

Author:

Doug Carey
By now many people understand that there is no reason to pay exhorbitant fees for a mutual fund. It has been shown time and time again in research studies that low-cost index funds on average always outperform actively managed, high-cost funds. With so many choices out there today and the ease of use of online trading platforms, there really is no excuse for paying the high fees associated with many actively managed funds.

In 2010 Vanguard, the pioneer in low-cost index funds, reduced the expense ratio on their S&P 500 Exchange Traded Fund (ETF) to an unimaginably low 0.06 How they make money on this fund is hard to understand, but it is an absolute gift to those who want exposure to U.S. stocks.

The typical actively managed U.S. mutual fund charges about 1.5per year in expenses. On top of that, there is constant turnover as portfolio managers trade in and out of stocks. This means capital gains taxes for any holdings that are sold at a gain. So on top of the 1.5annual expense, investors are paying higher taxes and also get dinged on the bid/ask spread for all of the trades that take place inside the fund. The bid/ask spread means the fund pays more for the stock than they can sell it for at that moment. This compensates exchanges which make markets in stocks.

Index funds rarely pay capital gains taxes and have very low turnover because the goal of these types of funds is to simply mirror a relatively static index, such as the S&P 500. Trades are only made when the constituents of the indexes change, which does not happen very often.

It is a simple exercise to compare high-cost funds vs. low-cost funds over time. I ran a comparison of the Vanguard S&P 500 ETF vs. the typical mutual fund that charges 1.5in fees, as well as a fund that charges 1in fees. I assumed an 8annual return for 30 years for each fund.

Starting with an initial investment of $10,000 the investor will have slightly over $97,000 using the Vanguard ETF. Using the actively managed fund, the total amount will be only a little more than $66,000. This is a 48difference in the total amount of money at the end of 30 years and all simply due to a difference in expenses. Also note that this does not take into account the higher tax bill in the higher-cost fund due to its turnover. With this taken into account, the difference in the investment values would be even larger.

Studies have shown that due to the higher expenses and higher tax bill, actively managed funds on average would have to outperform index funds by 4.3each year just to break even with them. Of the 452 equity mutual funds that have existed in the Morningstar database for at least 20 years, only 13 have outperformed the S&P 500 index by more than 4.3annually over this time period. That is less than 3of the funds investigated.

Investors have a vast array of choices these days when it comes to low-cost index mutual funds and ETFs. There is no easier way to increase your returns over time than to move from higher-cost actively managed funds to lower-cost index funds and ETFs. And this doesn\'t just apply to U.S. stocks. This also applies to U.S. bond funds as well as international stocks and emerging market stocks. Investors now have access to investing in international and emerging market ETFs that are tied to an index, which means very low trading activity. They also have much lower expenses than their actively managed counterparts.

So do yourself a favor and review your portfolio today. Readers can perform the same analysis I I\'ve discussed here by going to our free Planning Tools page and clicking on the link for Compare Investment Fees.

If any of your funds are actively managed and/or charge more than 0.3per year in fees, take a look at index funds and ETFs that invest in similar themes. It\'s an easy way to guarantee yourself more money when you retire.
Article Source: http://www.articlesbase.com/wealth-building-articles/why-you-should-avoid-high-cost-funds-5352799.html
About the Author
Doug Carey is the owner and founder of WealthTrace. He has over 16 years of experience in the financial markets. He is a Chartered Financial Analyst with a masters degree in Economics from Miami University in Oxford, Ohio and a B.S. degree in Economics, with an emphasis in Finance, from Ball State University. Before starting WealthTrace, Mr. Carey helped build a financial software company where he designed and created software to help portfolio managers and investment professionals analyze and manage portfolios and securities.

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Thursday, September 1, 2011

Investing for an Income

Traditional sources of income have become increasingly anaemic in recent times. Deposit rates have been slashed to kick-start economic growth. If you can get a 4% yield FD, you better not hesitate another time, but the fact is there is none now. While rental yields have been squeezed down to the valley bottom, there is hardly a property that can gives a 7-8% rental yield based on the current prices of the property market. As Government bond yield remain depressed in many countries, investor are turning to a surprising asset class to provide income - Asia Pacific equities.

Asian companies have not been noted historically for their corporate governance or focus on shareholder return. As a very broad generalization, dynamic growth and fierce competition in many sectors has led to growth for its own sake in recent decades. Market share mattered more than return on equity or efficient capital management.

The Asian Crisis of 1997 - 1998 literally crushed many over-leveraged businesses and provided a harsh lesson to those that survived. The capital destruction that marked the rise of some industries in Asia - where technology companies bought golf courses and start-ups owned corporate jets has become increasingly rare instead, managers are increasingly focused on more efficient and productive deployment of capital. This has seen corporate net dent across Asia Pacific (excluding Japan) fall by 2/3 to less than 20%, whist maintaining a strong, consistent return on equity. This is a painful lesson that other regions are only now starting to learn while for Asia over this time, the relative and absolute levels of dividend distributions have continued to rise.

There are 2 elements underpinning a company's dividend policy - the ability to pay and the willingness to pay. Lowered debt and strong earnings provide the ability to pay. We are also seeing an increased willingness to pay as companies embrace the culture of dividends.

There have always been the traditional pockets of yield within the region in sectors such as telecommunications and utilities. These areas have limited growth prospects, depending on the country, and have returned a significant portion of their cash flows to the investor. However we are seeing dramatic changes right now in sources of dividend yield. Some larger Korean and Taiwanese technology companies, having survived the 2001 crash and established a solid market share, are now returning value through dividends.

Looking across the globe at the moment, Asia Pacific offers a dividend yield in excess of most developed market. Chinese companies have started to embrace the dividend paying culture and it is expected that further opportunities will come in the future (etc. Maxwell). The Indian market is still slim in term of dividends but if this changes, the opportunities are immense. There are some areas which do have a comparable yield, but not one which offers Asia's combination or better growth, better demographics and better balance sheets.