No. of Recommendations: 0
For example the Fidelity Freedom Funds or the Vanguard Star.
I am looking to rollover a previous 401(K) into an IRA.
Or should I stick with an index fund?
Print the post Back To Top
No. of Recommendations: 3
I disagree with the 'fund of funds' approach.

This merely adds a second layer of administration, and hence, FEES! You'll essentially be hit twice for loads and/or fund management fees - once for the 'fund of funds,' and a second time for the funds that compose the original.

Do you think the manager of the 'fund of funds' is going to be a nice guy or gal and absorb the fees they must pay to buy a particular fund? I didn't think so either.

Stick with an index fund. The fees are nearly negligible, and over time that annual fee of a percent or two will eat away at your savings to a frightening amount. If you get the historical 11% a year from an S&P 500 index fund, you'll double your initial investment five times in about 32 years. For example, $1000 would grow to approximately $32,000. My math may be slightly off - running figures in my head.

If you pay two percent a year in management fees, and the fund matches the return of the S&P 500's traditional 11% a year, you'll actually make 9%. Big deal? Yep - your money only doubles four times in 32 years, and using the previous example you would only grow $1000 to $16,000. Ouch. You just gave up a down payment on a house to the investment firm.

Of course, an actively managed fund might beat the historical return of the S&P, right? Yep, they might...and historical averages show that 80% of the time they don't beat it!

Best wishes,

Mark
Print the post Back To Top
No. of Recommendations: 2
Greetings CentexHorn,

For example the Fidelity Freedom Funds or the Vanguard Star.
I am looking to rollover a previous 401(K) into an IRA.
Or should I stick with an index fund?


I do like the Vanguard LifeStrategy series and the few others that don't add another layer of fees which is likely the big issue. I would note that you have to be OK with the allocation of the fund of funds and want a very simple all-in-one fund. Vanguard Balanced Index(VBINX) would also be an idea to explore for those wanting a 60% stock/40% bond allocation.

Regards,
JB
Print the post Back To Top
No. of Recommendations: 0
I looked closer at Fidelity...the expense ratio shows to be .1%, but then it says something like "combined expenses" is .83%. I guess that's where the underlying funds get their cut, right?
Are you saying Vanguard does not have this extra layer of fees? That the .25% or whatever they show is the REAL cost?
Thanks, and Hook 'em!
Print the post Back To Top
No. of Recommendations: 3
Author: CentexHorn Date: 4/7/02 6:56 PM Number: 34114
Are you saying Vanguard does not have this extra layer of fees? That the .25% or whatever they show is the REAL cost?

That is correct. Vanguard does not charge any additional fees for managing their Life Strategy 'Fund of Funds'. They charge only the normal expense ratios for the underlying funds. I use the Vanguard Conservative Growth Fund (VSCGX) for some of my highly conservative money.

You can view (and download) the prospectus for all of the Vanguard Life Strategy Funds at: http://www.vanguard.com/pub/Pdf/lifestgy.pdf

Exerpt from prospectus:
***
LifeStrategy Conservative Growth Fund

INVESTMENT OBJECTIVE
The Fund seeks to provide current income and low to moderate growth of capital.

PRIMARY INVESTMENT STRATEGIES
The Fund invests in other Vanguard mutual funds according to a fixed formula that typically
results in an allocation of about 60% of assets to bonds and 40% to common stocks. The
percentages of the Fund's assets allocated to each of the underlying funds are:
n Vanguard Total Bond Market Index Fund 30%
n Vanguard Asset Allocation Fund 25%
n Vanguard Short-Term Corporate Fund 20%
n Vanguard Total Stock Market Index Fund 20%
n Vanguard Total International Stock Index Fund 5%
.
.
.
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal period ended October 31, 2001.

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)

Total Annual Fund Operating Expenses: None*

*Although LifeStrategy Conservative Growth Fund is not expected to incur any net expenses directly, the Fund's shareholders indirectly bear the expenses of the underlying Vanguard funds in which the Fund invests. See The Funds and Vanguard. The Fund's indirect expense ratio, based on its underlying investments, was 0.28% as of October 31, 2001.
***


Not a bad deal if you ask me!! Just about the simplest asset allocation strategy I have ever found.

RK
Print the post Back To Top
No. of Recommendations: 0
Greetings CentexHorn,

I looked closer at Fidelity...the expense ratio shows to be .1%, but then it says something like "combined expenses" is .83%. I guess that's where the underlying funds get their cut, right?

Yes and so your cost as measured by the expense ratio if you hold the fund is .83% while those running the fund only take .1% since they aren't doing much. Don't forget that transaction costs, those costs incurred by buying and selling securities, aren't part of the expense ratio.

Are you saying Vanguard does not have this extra layer of fees?

Yes.

That the .25% or whatever they show is the REAL cost?

No, but it is the real expense ratio. There are also transaction costs not mentioned in the expense ratio but are factored in when looking at published returns.

Regards,
JB
Print the post Back To Top
No. of Recommendations: 0
I also am a fan of (and invest in) Vanguard's LifeStrategy funds. There is not an extra layer of fees, as JB and others have pointed out.

Just thought I'd let you know that there are others out here who agree with what's been said.

Bagginses
Print the post Back To Top