Greg Buliavac: “OK, I haven’t looked at your mutual fund cost calculator, but my question is, why do you need to consider the costs of a fund? Why don’t you look just at the performance numbers, since performance is calculated after costs are subtracted?”
This is exactly the right question and a lot of you have asked it. We try to answer it in what I guess is too hidden a place on the Mutual Funds Cost Calculator site. (You reach it by clicking “more” on the first page.) Click here for a direct link. Two sections are most relevant: Because Predicting Costs Is Much Easier than Predicting Performance . . . and . . . But Don’t You “Get What You Pay For?”
But if you have time, read it all and let me know what you think.
Rodney Skidmore doesn’t buy it. He writes: “Give me an ‘expensive’ manager that delivers over a low cost manager that loses money, any day.”
Absolutely! Of the 11,000 funds out there, please list for me, below, any 3 that will significantly beat the market over the next few years on an after-tax basis:
We’ll check back a few years from now, and you’ll probably be rich and I’ll probably look like an idiot.
Even so, it’s just a lot harder finding these funds looking forward than back. Which is why instead of comparing a high cost manager that “delivers” with a low cost manager that loses money, I’d compare the high cost manager with a low cost manager that makes money — as so many do.
It’s counter-intuitive that really bright guys and gals who work at it can’t fairly consistently beat the market, and by more than the extra 3%-a-year handicap, say, that a high-cost, tax-inefficient mutual fund might have to bear. After all, in a normal environment, where stocks may be expected to return about 10% a year, having to do 3% better than the pack to cover the added costs — just to wind up doing average, that is, after costs and taxes are deducted from an investor’s return — is merely to have to do 30% better than the rest. And why should that be hard?
Well: it is.
And, with a high-cost, tax inefficient fund, that merely gets you even with the pack. Actually to beat the pack, you have to do better still.
Quote of the Day
Capitalism without bankruptcy is like Christianity without hell.~Frank Borman (ex-Eastern CEO)
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