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The Real Truth about Mutual Fund Fees












This discussion about mutual funds is different than almost
any information available on the web.  I will debunk some of
the oldest myths about mutual funds, and probably burst a
few bubbles for the low cost motivated do-it-yourself
investors.  

Much is written about mutual fund fees and promoted by no-
load fund marketing efforts.  Vanguard Group, one of the
largest fund families in the country, has built a whole
company on this idea.  It has been the mantra of Jack Bogle,
the company’s founder, for many years.  My hat is off to Mr.
Bogle’s achievement, but I believe it is a sales pitch more
than a reality.  A sales pitch that many people fall for as it
turns out.  In the October 5th, 2010 USA Today it states,
"Vanguard is now the largest mutual fund company.  It
would be tough to argue that Vanguard won its following
with white-hot performance."  Vanguard's largest fund at this
time is the Total Stock Market Index Fund.  The 10 year
average return on the fund is .3% a year.  The reason so
many people buy this argument is that, on the surface, it
seems to make sense.  Using Vanguard’s Fund Comparison
calculator promotes this myth.  You can find it here: https:
//personal.vanguard.com/us/funds/tools/costcompare. This
calculator will compare the costs of a Vanguard Fund to
another fund.  Since Vanguard’s funds have low expenses,
they typically come out on top of this comparison.  Since you
are a “smart investor” says Vanguard, it’s easy to see that
Vanguard should be your choice.  A report released in 2004
by Andrew Clark at Lipper Analytical Services, shows there is
no truth to this supposedly “smart” conclusion.  Mr. Clark
found two very interesting things…  There is no statistical
difference in performance between high and low fee funds
and past history is not a very good predictor of future
performance.  (In fact, in some categories, high fee funds
outperformed lower fee funds.)

Let’s look at the main premise of this idea...  Cheaper is
better.  When you go to buy a new car, are you looking for
the cheapest car on the car lot?  Based on the main premise,
that would be a “smart” move.  Understand this is different
than shopping different dealerships for the best price.  That
would be an apple to apple price comparison.  Comparing
these different funds on cost alone is not the same and is
not “smart.”  It might make you feel better to pay less of a
fee, but it doesn’t mean you will end up with a higher return.

This idea has been so overblown that I believe it is confusing
investors into making bad investment decisions.  They
cannot see the forest through the trees.  There is a financial
term called Internal Rate of Return or IRR.  This rate of
return gives you the “net” rate of return over time.  This is the
rate of return you earn after all fees and costs.  This is the
number you should use to pick investments, not the fee
amount.  Do you care if your fee is lower if your net return is
also lower?  I hope not.  Now that would not be “smart.”  To
be fair, I am not saying a high fee fund guarantees a higher
return.  The point I am making is that fees are of little use in
screening investments.  

If you have all your money in Vanguard or some other low
expense fund family, you have fallen for this ploy.  Vanguard
has some good funds.  But they don’t have all the good
funds by a long shot.  I have used some Vanguard funds in
my managed portfolios, but I don’t use them because their
fund fees are low.  I use them if their performance is good.  
Look beyond "the fee phenomenon"!  

Studies have shown that asset allocation is the largest
predictor of returns.  Asset allocation in combination with
your risk tolerance and tax situation should be your primary
concern and that is where we place most of our efforts and
expertise.  In closing, let me say it one more time:  Picking
your own low fee mutual funds does not guarantee you will
get a higher return.  As Mr. Clark pointed out in his study, it
doesn’t even put the odds more in your favor.

Lynn C. Appelman








250 Schoolhouse Road, Bloomsburg, PA  17815      
(570) 784-1716 or (800) 598-4998  Fax: (570) 784-8768

Securities Offered through Trustmont Financial Group, Inc.  Member FINRA/SIPC
and Trustmont Advisory Group, Inc.
200 Brush Run Road, Suite A, Greensburg PA  15601  (724) 468-5665
* Appelman Financial is not affiliated with either Trustmont Financial Group, Inc. or Trustmont Advisory Group, Inc.