Recent posts by John Ameriks
John Ameriks leads Vanguard's Investment Counseling & Research group, which provides portfolio recommendations along with topical commentary and investment counseling.
A while back, I wrote about how people often miss the impact of investment costs on wealth accumulation. Today, I want to make sure readers know that it’s as critical for retirees (people spending money) to think about how costs hit their portfolios as it is for people who are still saving. In fact, you might say that by taking a bite out of both income and wealth over time, costs actually hit retirees with a “double whammy.”
I have to admit up front that if you’re reading this blog based on the title, you’re in for a bit of a surprise, and I hope you won’t feel too bad about being hoodwinked.
Articles with titles like this are almost obligatory in the financial press this time of year. If you’re reading this, you know why: They get people to read. Everyone wants an inside track on what’s going to be “hot” next year.
There continues to be a lot of focus on the consequences of today’s low-rate environment. In such an environment, one of the most important things an investor can do is economize on the cost of the financial services they’re buying (translation: find lower expense ratio funds!).
Still, it never ceases to amaze me how much people continue to neglect the “silent killer” of long-term returns—high investment costs. Every now and then, I see articles that talk about the bite that investment costs can take out of a portfolio over time. But many times, these articles talk about how much of your “returns” an investment manager takes via fees. For example, if a fund charges a 1% fee and you anticipate a 5% gross return, it’s often observed that you’re giving up “20% of your return” (1% of the 5%) to costs. Jack Bogle likes to point out that the cost is dramatically higher when thought of as a percentage of after-inflation, after-tax returns: accounting for inflation of 2% and effective taxes of (say) 20% on the total return, your after-tax, “real” return is reduced to 2%, and a 1% fee is 50% of that!
In the past, I have expressed frustration with the financial press’s coverage of investment topics (Clearing the air on target date performance), and I’ve also blogged about how I feel investors are best served by ignoring financial pundits (Listening to the markets—not the pundits).
But occasionally, a fleeting glimpse of a longer-term, clearer reality is visible beneath the smoke and ashes of the “financial catastrophe of the week” featured in the headlines. It’s worth pointing it out when it happens—such as in the article Mixed emotions on our anniversary, which ran in the September 11 edition of the Wall Street Journal. The article offered a real-life example of what a long-term investment strategy can mean for an employee who makes a biweekly contribution of $250 to their 401(k) and gets a $125 employer match.
Given all the market volatility, a lot of folks are wondering about whether now might be the right time to rebalance their portfolio.
Vanguard researchers present an in-depth discussion of rebalancing in this paper. This analysis emphasizes that historically, rebalancing once or twice a year—and only doing so when a portfolio had wandered from its asset-allocation target by at least 5%—produced absolute return/risk results quite close to those resulting from more frequent, complicated, and time-consuming rebalancing efforts. The “take away” is that when it comes to rebalancing, doing it once or twice a year can be useful—and for many investors, there’s little point in making it more complicated than that.