Is Your 401K Screwing You?


Mother's Little Helper portfolio was UP today +$646.65 (0.61%).

Overall GAIN YTD: +$5,164.33 (+5.16%).

Our benchmark index, the S&P 500 is UP +5.11%

http://money.cnn.com/data/markets/sandp/

"Investing should be more like watching paint dry or watching grass grow.

If you want excitement, take $800 and go to Las Vegas."

- Paul Samuelson

I made my buys for the year on December 28, 2018, see the new portfolio here (Click Here).

A Boring Portfolio?

Just 19 days into the new year and the portfolio has a slight edge on the S&P 500, our benchmark for performance. I admit it, the portfolio is boring. Watching a group of index funds track the market has less excitement than picking individual stocks and seeing if we picked the right ones or the wrong ones. Truth is, you can pick the wrong index fund just as easily as you can pick the wrong stocks. For instance, to track the S&P 500 our portfolio is using the Vanguard Total Stock Market ETF (VTI), I could just as easily have selected the Great-West S&P 500® Index Fund Investor Class (MXVIX). Looking at both funds we would find that they both do a good job of tracking the S&P 500 and the Great-West S&P 500 does have $3.25 billion dollars under management. But when we look at the Vanguard fund we find that the VTI has $662.58 billion dollars under management and also lists the average daily volume at 2,467,833 shares; the MXVIX doesn't list their volume; this is important for liquidity. In fact I found that the NET Asset value of the MXVIX is different on different financial sites. But what I really care about is the expense ratio, what management charges to run the fund. Vanguards VTI has an expense ratio of just 0.04% while Great-West MXVIX charges 0.60%. They both do the same thing, yet the MXVIX charges 15 times as much. Want to really show what a big spender you are, try the Rydex S&P 500 C (RYSYX). This also is an S&P 500 tracking index fund, it does the same thing that the Vanguard VTI does, yet the fund charges a whopping 2.33% for the privilege. My research suggests that there are more than $23 billion dollars invested in S&P 500 Index funds with expense ratios of at least 0.50 percent. WHY! That's insane. Would you pay $60 for a coffee at Starbuck because it came with a free brownie?

Check your 401K, these high cost funds are often packaged in the plans employers offer. The advisers who assist small and medium sized businesses with 401K plans sometimes offer these funds because they pay high commissions, not because they increase the value of your retirement account. Here is a link to a good source to check the fees in your plan:

America's Best 401K

So let's review the purpose of this portfolio.

First, we want to keep pace with the market and maybe outperform the overall market a little by having a diversified portfolio of index funds that provide exposure to both U.S and International companies. So far we're achieving that goal.

Second, we want to keep our expenses associated with commissions and fund expenses as low as possible so that our returns are as high as possible. Assuming all shares were bought using an online, discount broker (Schwab, ETrade, TD Ameritrade, etc) commissions should be about $4.95-$6.95. As far as expenses go, the funds selected are the lowest or one of the lowest available. In general, Vanguard has the lowest cost funds and the most liquidity due to the size of the funds. The whole portfolio can be sold for less than $40 in commissions. I feel good about this goal.

Third, we want the funds we select to be highly liquid, meaning we can sell shares fast and convert anything we have to cash right away. The funds selected have enough share volume and assets under management to provide that liquidity. In a couple of cases I chose liquidity over performance. I think I can say 'mission accomplished' for this goal.

Fourth, I'm going to add this extra goal, we don't want to have to watch and worry about our investments all the time. This is a set-it-and-mostly-forget-it portfolio.

"Know what you own, and know why you own it."

- Peter Lynch

As Always

Stay Invested

Clay Baker

Disclosure: I am personally invested long in some or all of these funds that appear in the Mother's Little Helper portfolio or manage these investments for my Mother's portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the MLH portfolio. Since I may on occasion discuss Bitcoin and other cryto currencies I disclose here that I personally own investments in the cryto-currencies listed here: VTI, VWO, VEA, VIG, XLE, MUB, TBT, GLD, Bitcoin, LiteCoin

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved