May 01

Last February, I asked the question – Are you 401(k)o’ed? I was concerned that my readers might not have been aware of the fees they were paying inside their 401(k) retirement accounts. It seems that this topic has hit the mainstream media, and recently, PBS’ Frontline ran their story The Retirement Gamble which you can see on line if you missed it.

The message is simple, over time, fees will destroy your returns. Over a lifetime of investing the difference between a .1% cost and a 2% cost is insane.


Jack Bogle, the father of index investing, is interviewed and discussed these numbers, how the market might grow your $10,000 to over $45,000 over 50 years at 8%, but a 2% per year cost will confiscate nearly 2/3 of your returns. Unfortunately, Jack misspoke when he said, “Get Wall Street out of the equation. Get trading out of the equation. Get management fees out of the equation. You own American business and you hold it forever. That’s what indexing is. Own a fund that owns the entire U.S. stock market, does no trading, and has a cost of 1 percent a year to own. And that is the only way to do it. Then you’re with a creature of the market and not of the casino.” Even 1% isn’t great, you’d still lose 1/3 of your money over the five decades in his example. A tenth of a percent is more like it. Over the years, there’s still a $20,000 loss to fees, but we’re talking 50 years in the example. The quote got it right, but I think Jack meant to say a tenth percent.

It was decades ago that Jack Bogle promoted the concept of indexing and founded Vanguard’s Indexed Mutual Funds long before ETFs were invented. Anyone who has any background in finance and investing would be aware of Bogle, Vanguard, and Bogle’s thesis that managed funds can’t add enough value to exceed their high costs.

Everyone except for Christine Marcks, President, Prudential Retirement who responded with, “Yeah, I haven’t seen any research that substantiates that. I mean, it— I don’t know whether it’s true or not. I honestly have not seen any research that substantiates that.” The interviewer asked if she’d seen the research Vanguard had done on the topic and she replied, “No, I haven’t. I haven’t— I haven’t read everything. But so much of it depends on, you know, what I need is different than what you need and there’s not an asset allocation or a fund strategy that’s right for everybody.”

One last quote from Jason Zweig of the Wall Street Journal, “And one of the ultimate dirty secrets of the fund industry is that a lot of people who run other fund companies own index funds in their— in their own accounts and don’t talk about it, I mean, unless you put a couple beers in them.” I suspected that, myself.

To be fair, not all 401(k) funds have such high expenses, the S&P fund in my own 401(k) is .06%, less than a 3% hit over 50 years. Frontline also missed, or ignored, any discussion of matched funds. My own advice is when your company offers a dollar for dollar match, you should grab it. The decades pass quickly and you’ll look back at a high six figure account and see how nearly half the money came from your employer instead of from your wallet.

Check out the show and let me know, did you feel it was balanced? Was I too tough on Christine Marcks? Have you check the fees inside your own 401(k)?

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Jun 24

I’ve always respected Vanguard founder Jack Bogle, he is considered to be the “Father of the Index fund” and has saved investors many billions of dollars in fees by creating low cost index funds, starting a new industry within the financial services market.
The natural follow on to index mutual funds are the ETFs which are now also commonplace. Vanguard recently announced that if you hold a Vanguard Index fund for which they also offer an ETF, you can now swap the fund for the EFT with no tax consequence, and only a nominal fee ($50). Here is the Q&A from the Vanguard site:

Can I convert conventional Vanguard mutual fund shares to Vanguard ETFs?

Shareholders of Vanguard stock index funds that offer Vanguard ETFs may convert their conventional shares to Vanguard ETFs of the same fund. This conversion is generally tax-free, although some brokerage firms may be unable to convert fractional shares, which could result in a modest taxable gain. (Bond ETFs do not allow the conversion of bond index fund shares to bond ETF shares of the same fund.)

Vanguard will charge $50 for each conversion. (This fee is waived for Flagship clients.) Your brokerage provider may charge an additional fee for this service. For more information, contact your brokerage firm, or call 866-499-8473.

Once you convert to Vanguard ETFs, you cannot convert back to conventional shares. Also, conventional shares held through a 401(k) account cannot be converted to Vanguard ETFs.

When the market is up from where you bought in, this can let you make the swap without having to declare capital gains. In this down market, it can benefit you by not forcing you to declare a loss when it may not be advantageous to do so.

If you are looking for a broker check out Craig Ford’s How to Find an Online Discount Stock Broker, a great read.


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May 10

Just thought I’d take a look back and share some fellow bloggers’ posts that caught my attention this week:

From Moolanomy’s Personal Finance, an article titled 40+ Alternative Income Ideas and Resources. Actually, he’s up to 50 as I write this, he’s added a few more since the original posting. Here, the author shares his list of ways to make extra money, running the full range of the very simple, such as selling your old stuff on eBay, to the second career level of commitment, such as “get a second job.” This isn’t just a list (lest you think “get a second job? d’uh?) but nearly every item on his idea list offers a further link for more details and to start your research if that idea appeals to you.

Flexo at Consumerism Commentary alerts his readers that Schwab Brokerage Lowers Expense Ratios, Beats Vanguard. This bit of news didn’t get the press I’d have expected. Funny, I am a Schwab customer, and I’d not have seen this news if it weren’t from Flexo, the blog author. My experience investing tells me that over time, the difference between excellent results and results that simply fail to please, is expenses. Something to consider.

At Five Cent Nickel is Risk Tolerance vs Risk Capacity. An excellent piece describing the difference between Tolerance (one’s attitude) vs Capacity (goal based risk required for one’s situation). A further link offers a quiz to show you a number to determine your level for each.

One last one I’ll share today, a personal post from Mrs. Micah, is What I’d like to Give my Mom for Mother’s Day. As we get bogged down in the day to day grind, it’s posts like this that make you stop and think, about people and not things. About those whom you love, and not the stupid issue you had at work this past week.

Happy Mothers Day, everyone.

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