Investigating Your Investments

I was doing a little financial “spring cleaning” a few days ago and reviewing one of my wife’s old brokerage accounts.  I uncovered a few things that I thought would make an interesting post.  As a bit of background, the brokerage account was started in 2004 by Random Gal’s mom.  I’m not sure whether it started out as a custodial or joint account, but as of right now my wife is the account holder.  Although this is the case, her mom remained the primary “investor” until recently.  She relinquished control of the account to us and I got the OK to start managing the assets. The first thing I did was to review the investment holdings, and boy was it a revelation!


Account Autopsy

When I pulled up the account summary screen, I was surprised to find a total of 13 different mutual funds!  There were also holdings of seven individual stocks and a cash/money market account.  The individual stocks were actually not that bad, but the mutual funds were a nightmare!


Lots of Holdings ≠ Diversification

Holding a lot of different mutual funds does not necessarily equate to diversification.  In looking at each individual mutual fund, I found some overlap and redundancies.  Of the 13, there were three large cap value funds, two large cap growth funds, a world equity fund, an international fund, and a balanced fund that holds stocks, bonds, and cash.  Does one really need three different large cap value funds?  In my opinion, no they don’t.


Check Your Fees!

Not only was there some overlap between different funds, there were also high fees associated with these holdings.  Out of the 13 funds, none are index funds, which means that all of them are actively managed funds.  I haven’t talked much about my investment style and philosophy (topic for a future post), but in essence I am a fan of passive index funds and minimization of fees.  All of the funds have 12b-1 fees, and nearly all have some kind of load fee.  In terms of expense ratios, the lowest one was 0.85%.  The highest expense ratio was a whopping 2.09%!  I nearly threw up on myself and my laptop when I saw these fees.  This link summarizes the different kinds of mutual fund fees and expenses.


The Eroding Effect of Fees

I’m a big fan of minimizing fees.  I think it’s one thing that you can control that can help maximize your investment returns.  The less you pay in annual expenses, the more of your returns you get to keep.  Like compound interest, fees can add up over time.  And not in a good way!  The table and graph below shows the returns of an initial, one time investment of $10k using different expense ratios (ER) and assuming an annual return of 5%.

ER Year 0 Year 10 Year 20 Year 30
0.16% $10,000.00 $16,030.19 $25,696.70 $41,192.31
0.85% $10,000.00 $14,956.16 $22,368.68 $33,454.96
2.00% $10,000.00 $13,309.26 $17,713.63 $23,575.52


For this example, I used the highest and lowest expense ratios from the aforementioned mutual funds (0.85% and 2%) and compared them with the expense ratio of Vanguard’s Total Stock Market Index Fund Investor Shares (0.16%).  As you can see, fees can add up over time and erode the returns of your investments.  After 30 years, the difference between the most expensive fund and the Vanguard fund is over $17k.


Plans Going Forward

Our ultimate goal for this brokerage account is to simplify and streamline the holdings. We’ve decided to keep the individual stocks as is and exchange the old mutual funds for new ones.  Ideally, we would want the new holdings to be low-cost index funds.  The problem is the account is a taxable account and exchanging any of the current mutual funds for a new one would generate capital gains.  Although these would be taxed at the lower long-term rate, it’s still tax nonetheless.  And nobody likes paying taxes.  One option would be to exchange all the funds now into a low-cost, total market index fund and bite the bullet in terms of capital gains.  Another option would be to exchange only the funds that have decreased in value and hold on to the funds that have had gains.  This option sounds appealing as we could potentially reduce our taxable income by tax loss harvesting.  However, this is easier said than done as the majority of the mutual funds have incomplete or missing cost basis information, so figuring out which funds have gains or losses would be a nightmare.  Right now, Random Gal and I are leaning toward exchanging all of the funds in one fell swoop and just paying the capital gains tax up front.


Random Guy’s Final Thoughts

I hope you guys found this post useful and informative.  I think it’s always helpful to review your finances regularly as you might come across something that could be costing you money, like high fees or tax-inefficient funds.  At the very least, I hope this motivates you to get to some of the financial spring-cleaning that you’ve been putting off for later. Thanks for reading! Comments and thoughts appreciated!

6 thoughts on “Investigating Your Investments

  • November 19, 2016 at 5:43 pm

    Studies show that actively managed funds do not beat index funds. So in this world of investment, expertise does NOT matter. I think you should only pay for expertise if it makes a difference. In the world of medicine, if your neighbor could take out your gall bladder just as well as a surgeon and at a lower cost why would you pay a surgeon? In many things outside of the stock market, expertise does matter.

    Thanks for sharing your post, it is too bad you can’t do a 1031 exchange with your mutual funds and avoid the capital gain like you can with real estate.

    • November 19, 2016 at 9:33 pm

      Thanks for the comment! I share the same sentiment as you in regards to actively managed funds. Why should I pay someone else when I can do just as well, if not better, on my own and with less fees? Thanks for stopping by!

  • November 19, 2016 at 7:08 pm

    Oh man my father in law must have been following the same advice your mother in law was getting. He had tons of mutual funds and two different gold funds. When I asked the money manager managing my father in law’s money why he had a euro gold fund and a U.S. gold fund he started to mumble the answer and I knew he had no idea.

    We quickly moved all the money into low cost index funds with Vanguard. We took the hit right away because I was tired of the fees eating up the gains.

    Good luck with your decision!!!

    • November 19, 2016 at 9:41 pm

      No doubt. I suspect that she started the account with the help of either a broker or an advisor. I think we’re probably going to move them all into a total stock market index fund and just take the tax hit up front. There are a few funds that I’ll be able to tax loss harvest, so at least there’s that. Thanks for stopping by!

  • November 21, 2016 at 6:06 pm

    When I started my own taxable brokerage account, I didn’t exactly know what I was doing. The assortment of funds I ended up with didn’t look quite as bad as your wife’s collection, and there were no 12b-1 fees, fortunately. But it was a pretty random collection of funds and not a part of any overall plan.

    Once I knew better than to keep these funds, over the course of several years, I sold some to finance a home purchase and donated a substantial chunk to start our first donor advised fund. The DAF is an option that won’t make you any wealthier, but if you’re feeling generous, it can be an excellent option. The capital gains disappear, and you get the full deduction of the value of the donated funds (up to 30% of taxable income).


    • November 22, 2016 at 2:36 am

      Thanks for the comment! That’s a great idea. I honestly didn’t think about that option because we’re kinda still in the accumulation phase, but it’s definitely something for us to think about and look in to. Thanks for stopping by!

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