Comments on: How to Retire on Half as Much Money http://www.obliviousinvestor.com/how-to-retire-on-half-as-much-money/ Investing Blog: The Oblivious Investor Tue, 07 Feb 2012 17:04:11 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: FinanciallySmart http://www.obliviousinvestor.com/how-to-retire-on-half-as-much-money/comment-page-1/#comment-4229 FinanciallySmart Fri, 18 Dec 2009 00:50:31 +0000 http://www.obliviousinvestor.com/?p=5333#comment-4229 Thank you for a wonderful article. Thank you for a wonderful article.

]]> By: Mike http://www.obliviousinvestor.com/how-to-retire-on-half-as-much-money/comment-page-1/#comment-4165 Mike Mon, 07 Dec 2009 17:00:48 +0000 http://www.obliviousinvestor.com/?p=5333#comment-4165 "<i>Are these from transactions that keep the fund in line with the index that they are following?</i>" Yep. The stocks in the S&P 500 change over time, so index funds that track the S&P 500 must also make portfolio changes over time. As to the weighting of a given stock within an index, nearly all stock indexes are market-cap-weighted. As a result, an index fund doesn't really have to do much to keep the weightings correct. (That is, it's not as if Standard and Poors suddenly decides to double the weight of AT&T in the index, thereby causing each fund to have to double up on its AT&T holdings.) “Are these from transactions that keep the fund in line with the index that they are following?”

Yep. The stocks in the S&P 500 change over time, so index funds that track the S&P 500 must also make portfolio changes over time.

As to the weighting of a given stock within an index, nearly all stock indexes are market-cap-weighted. As a result, an index fund doesn’t really have to do much to keep the weightings correct. (That is, it’s not as if Standard and Poors suddenly decides to double the weight of AT&T in the index, thereby causing each fund to have to double up on its AT&T holdings.)

]]> By: Damilola http://www.obliviousinvestor.com/how-to-retire-on-half-as-much-money/comment-page-1/#comment-4164 Damilola Mon, 07 Dec 2009 16:50:55 +0000 http://www.obliviousinvestor.com/?p=5333#comment-4164 In regards to turnover, I also noticed that index funds also have turnover rates e.g. 5.6% for VFINX, although at a much lower rate than actively managed funds. Are these from transactions that keep the fund in line with the index that they are following? And if that were the case, how often do indexes change their ratios because I assumed that they kept a fixed amount of stock forever, unless a certain stock was removed and another added. Now that assumption might be WAY off base, but perhaps you might be able to shed some light on that. In regards to turnover, I also noticed that index funds also have turnover rates e.g. 5.6% for VFINX, although at a much lower rate than actively managed funds. Are these from transactions that keep the fund in line with the index that they are following? And if that were the case, how often do indexes change their ratios because I assumed that they kept a fixed amount of stock forever, unless a certain stock was removed and another added.
Now that assumption might be WAY off base, but perhaps you might be able to shed some light on that.

]]> By: Roger http://www.obliviousinvestor.com/how-to-retire-on-half-as-much-money/comment-page-1/#comment-4163 Roger Mon, 07 Dec 2009 15:03:15 +0000 http://www.obliviousinvestor.com/?p=5333#comment-4163 Good commentary. It's too easy to ignore the real cost of investment expenses, both while saving for retirement and when withdrawing our investments for retirement. An impressive amount of supporting evidence, as well. Speaking of good posts, this one was chosen as second best for the latest edition of the Best of Money Carnival. You can catch your fellow good contributors here: http://www.theamateurfinancier.com/blog/best-of-money-carnival/ Thanks for the contribution, and keep up the great work. Good commentary. It’s too easy to ignore the real cost of investment expenses, both while saving for retirement and when withdrawing our investments for retirement. An impressive amount of supporting evidence, as well.

Speaking of good posts, this one was chosen as second best for the latest edition of the Best of Money Carnival. You can catch your fellow good contributors here: http://www.theamateurfinancier.com/blog/best-of-money-carnival/ Thanks for the contribution, and keep up the great work.

]]> By: Mike http://www.obliviousinvestor.com/how-to-retire-on-half-as-much-money/comment-page-1/#comment-4155 Mike Wed, 02 Dec 2009 22:00:13 +0000 http://www.obliviousinvestor.com/?p=5333#comment-4155 Hi Damilola. The 1.6% figure comes from the Investment Technology Group's estimate that each transaction results in costs (market impact, plus any commissions, plus bid/ask spread) equal to 0.8% of the value of the transaction. Combining that with figures regarding portfolio turnover (available via Morningstar) that show that actively managed funds turnover their portfolios at a rate of roughly 100% per year gives us a total cost of 1.6%. (The reason the figure gets doubled is that we assume that for each time something is liquidated, the funds are reinvested--two total transactions. Or, if there was 100% turnover, an amount equal to 100% of the portfolio was sold, and an amount equal to 100% of the portfolio was bought.) Hi Damilola.

The 1.6% figure comes from the Investment Technology Group’s estimate that each transaction results in costs (market impact, plus any commissions, plus bid/ask spread) equal to 0.8% of the value of the transaction.

Combining that with figures regarding portfolio turnover (available via Morningstar) that show that actively managed funds turnover their portfolios at a rate of roughly 100% per year gives us a total cost of 1.6%.

(The reason the figure gets doubled is that we assume that for each time something is liquidated, the funds are reinvested–two total transactions. Or, if there was 100% turnover, an amount equal to 100% of the portfolio was sold, and an amount equal to 100% of the portfolio was bought.)

]]> By: Damilola http://www.obliviousinvestor.com/how-to-retire-on-half-as-much-money/comment-page-1/#comment-4154 Damilola Wed, 02 Dec 2009 21:37:58 +0000 http://www.obliviousinvestor.com/?p=5333#comment-4154 I always enjoy how you're able to fill in the blanks in the areas that we sometimes ignore e.g. avoiding 401k fees and including fees in the 4% withdrawal. One thing I wasn't sure of though was the 1.6% due to turnover. I rememeber reading somewhere (either here at your blog or in a book or something) where turnover ratio was believed to add like 10% of the turnover rate or something like that so I was wondering if the 1.6% was also based on that assumption? I'll try to research where I read that, but I thought you might have seen that somewhere as well. I always enjoy how you’re able to fill in the blanks in the areas that we sometimes ignore e.g. avoiding 401k fees and including fees in the 4% withdrawal.
One thing I wasn’t sure of though was the 1.6% due to turnover. I rememeber reading somewhere (either here at your blog or in a book or something) where turnover ratio was believed to add like 10% of the turnover rate or something like that so I was wondering if the 1.6% was also based on that assumption? I’ll try to research where I read that, but I thought you might have seen that somewhere as well.

]]> By: Rick Francis http://www.obliviousinvestor.com/how-to-retire-on-half-as-much-money/comment-page-1/#comment-4152 Rick Francis Wed, 02 Dec 2009 16:03:25 +0000 http://www.obliviousinvestor.com/?p=5333#comment-4152 Mike, That's a great point- I've often heard the 4% rule but I wasn't aware it didn't include investment fees. When it comes to investing over the long term 1% is a big difference, 2% is gigantic! People just don't really get <a href="http://ponderingmoney.com/2009/10/12/you-need-to-understand-compound-interest/" rel="nofollow">compound interest</a> but even as small a difference as 0.75% over many years can make a difference of hundreds of thousands because <a href="http://ponderingmoney.com/2009/10/21/lessons-of-compound-interestinterest-rates-matter/" rel="nofollow">interest rates matter a lot!</a> -Rick Francis Mike,

That’s a great point- I’ve often heard the 4% rule but I wasn’t aware it didn’t include investment fees. When it comes to investing over the long term 1% is a big difference, 2% is gigantic! People just don’t really get compound interest but even as small a difference as 0.75% over many years can make a difference of hundreds of thousands because interest rates matter a lot!

-Rick Francis

]]> By: Wealth Pilgrim http://www.obliviousinvestor.com/how-to-retire-on-half-as-much-money/comment-page-1/#comment-4151 Wealth Pilgrim Wed, 02 Dec 2009 14:14:25 +0000 http://www.obliviousinvestor.com/?p=5333#comment-4151 Mike, Good job here. You are right...all the studies show a withdrawal rate based on index investing. If 80% of the funds perform worse than the index (because of fees partially), we have a problem. One way to reduce the "drag" is, as you suggest, go with the low-cost funds. I think it's important however to remember that reported results are always net of fees. So, if an investor is comparing an actively managed fund with a passive fund, s/he can look at the reported results and know that the returns are shown net of fees. Anyway, this is a very important point you bring up and one that has been completely ignored. Bravo! Mike,

Good job here. You are right…all the studies show a withdrawal rate based on index investing. If 80% of the funds perform worse than the index (because of fees partially), we have a problem.

One way to reduce the “drag” is, as you suggest, go with the low-cost funds.
I think it’s important however to remember that reported results are always net of fees. So, if an investor is comparing an actively managed fund with a passive fund, s/he can look at the reported results and know that the returns are shown net of fees.

Anyway, this is a very important point you bring up and one that has been completely ignored. Bravo!

]]> By: Alexandra http://www.obliviousinvestor.com/how-to-retire-on-half-as-much-money/comment-page-1/#comment-4150 Alexandra Wed, 02 Dec 2009 14:13:36 +0000 http://www.obliviousinvestor.com/?p=5333#comment-4150 Excellent advice. Thank you. Excellent advice. Thank you.

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