One of the core tenets of the Boglehead philosophy is to minimize fees whenever possible. That sounds reasonable enough on the surface, but in this video I'll explain why it's not so simple and why fees aren't as big of a deal as they're made out to be.
I always try to stress the fact that fund fees should be considered and spoken about not in absolute terms but rather in a relative sense for whatever exposure you're paying for.
I'll explain what that means.
Suppose I tell you nothing about two investments except that Investment A has a fee of 1% and Investment B has a fee of 2%. Is one better than the other? Many would reflexively say Investment A with the lower fee is better, but in reality we don't have enough information to draw that conclusion. Investment A may have a return of 5% while Investment B has a return of 7%, in which case we're still coming out ahead after fees with Investment B despite it having the greater expense ratio.
Of course, we can't know realized returns ahead of time, but we develop our investing strategy using expected returns and target exposure that align with our personal goal(s), time horizon, and risk tolerance.
Here's a more concrete example. VBR is an index fund from Vanguard for U.S. small cap value stocks that has a fee of 0.07%. SLYV is another U.S. small cap value fund from SPDR with a fee of 0.15% that uses a different index. Should we prefer the cheaper VBR? In this case I'd say no, because the selection methodology of the index that VBR tracks results in stocks that are neither very small nor very value-y.
The simple point is that it makes little sense to speak about fees in absolute terms and compare funds on that dimension alone, which unfortunately is usually the case with devout Bogleheads. Instead, aim to assess whether or not the exposure you're paying for is worth that fee.
Consider VTI, an ETF from Vanguard to capture the total U.S. stock market. It has an expense ratio of 0.03%. Its mutual fund equivalent VTSAX has a fee 1 basis point higher at 0.04%. For $100k invested, that would be respective annual fees of $30 and $40, so assuming identical pre-tax returns, you'd save a whopping $10 per year going with VTI.
The point is investors should not waste time obsessing over small differences in fees and should instead focus on much more impactful things like asset allocation, cutting expenses, increasing income, and ensuring their strategy aligns with their goals and risk profile.
// TIMESTAMPS:
00:00 - Intro
00:13 - Fees Are Relative
02:46 - Small Differences in Fees
// SUMMARY:
Read the blog post here: www.optimizedportfolio.com/fees/
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10 дек 2023
