The Impact Of Expense Ratios On Retirement Income

Ted

FYI: While individual securities (such as shares of stock in a publicly traded company or a bond issued by a company or government) do not have an annual expense ratio, mutual funds and ETFs always have an expense ratio. The annual expense ratio of a stock or bond mutual fund directly reduces the return of the investor, which reduces the amount of money that can be safely withdrawn during retirement.
Regards,
Ted
http://www.aaii.com/journal/article/the-impact-of-expense-ratios-on-retirement-income

ibartman

Ted - thank you. Also see discussion here regarding expense ratios and SWR's:

Pfau & Dokken: Why 4% Could Fail - Rethinking Retirement
https://mutualfundobserver.com/discuss/discussion/23490

Wade Pfau’s new book: How Much Can I Spend in Retirement? (@ Bogleheads.org)
https://www.bogleheads.org/forum/viewtopic.php?t=229814

hank

All true, but mainly over longer periods. However, if you’re of the more “flighty” group, buying and selling many times a year, I’m not sure fund management fees (ER) make a lot of difference. Other things count a lot more in that case, such as market trends, mananagement insight & approach, relative valuation of different asset classes (and possibly trading costs).

msf

ER's being relatively meaningless if one trades frequently is one of those pieces of "common wisdom" that never seemed quite right to me.

Sure, if you trade monthly and one of those funds (that you own for a month) has a high ER, it won't make much of a difference. But if you're flitting from one high cost fund to another, it's no different from owning one high cost fund for the whole year.

Paying 1/12 x 2% for a month, twelve times a year, is the same as owning one 2% fund for the entire year.

I can understand the idea of moving from sector to sector, or region to region, at a frenetic pace. But just as the ER of a single short term holding won't make much difference, ISTM that whoever is managing that single holding also won't make much difference over a very short term.

The other factors that hank mentioned, market trends and asset class valuations strike me as dominant. You can get focused exposure to these factors with low cost ETFs. No need to resort to high priced funds. (Yes, even I will say that ETFs have a role to play. They replace what Fidelity Select Portfolios used to do, back when they traded hourly.)

davidrmoran

Are there not always penalties for trading a fund so frequently? I thought I had never seen that not be the case.

And of course you can get automatic sector churning, of a sort and so to speak, in the DSE_X funds.

msf

Whether there are penalties imposed by the brokerage and/or short term redemption fees imposed by the fund depends on the fund and the brokerage. Generally speaking, Rydex, Profunds, and Direxion funds are designed for rapid trading, and brokerages don't impose penalties for doing this.

For example, here's E*Trade's footnote (2) on NTF trading there:

To discourage short-term trading, E*TRADE Securities will charge an Early Redemption Fee of $49.99 on redemptions or exchanges of no-load, no-transaction-fee funds that are held for less than 90 days. Direxion funds (other than the Indexed Commodity Strategy Fund DXCTX), ProFunds, Rydex mutual funds, and all money market funds are not subject to the Early Redemption Fee.

Of course, these "specially designed funds" come with those high ERs that hank was talking about.

Here's an earlier MFO thread on the same topic:
https://mutualfundobserver.com/discuss/discussion/5395/penalty-fees-for-short-term-holding