Vanguard LifeStrategy Funds

June 9th, 2008  |  Published in Asset Allocation, Retirement  |  1 Comment

Lifecycle, Lifestyle, Target Retirement… and now LifeStrategy. Are these all the same things? Are they different? Is it just branding at work?

LifeStrategy is Vanguard’s trademarked name for a Lifestyle fund. If you recall the differences between a Lifestyle and a Lifecycle fund, a lifecycle fund is one that changes its asset allocation as time passes. A lifestyle fund, on the other hand, remains static and is like a snapshot in time of a lifecycle fund.

Vanguard added four LifeStrategy funds – Conservative Growth, Growth, Income, and Moderate Growth. The Conservative Growth Fund is 20% short term reserves, 30% bonds, and 50% stocks. The Growth Fund is 0% short term reserves, 10% bonds, and 90% stocks. So you can see, the Growth Fund is significantly more aggressive than the Conservative Growth Fund.

It’s essentially the same thing as a Lifestyle fund, simply wrapped in a different name.

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The 156th Carnival of Personal Finance is available at PT Money and my post on Naming Beneficiaries on Retirement Plans was included.

Strata of Mutual Fund Expense Ratios

May 19th, 2008  |  Published in Mutual Funds  |  3 Comments

One of the most important characteristics about a mutual fund is its expense ratio. The expense ratio is the cost of running the fund and is charged to cover the expenses of running that fund, usually represented by a percentage of assets. Some of the things the expense ratio covers include, but are not limited to, the investment advisory fee, administrative costs, 12b-1 distribution fees, operating expenses, and paying for the fund manager’s Mercedes-Benz car allowance (just kidding on the last one).

The expense ratio is also one of the easiest things for you to control when you select a fund. You can’t predict the future with respect to returns, but you sure can predict how much of your investment is consumed by the operational expenses of a fund.

So, what are the three strata of mutual fund expense ratios? Passively managed funds, actively managed funds, and hedge funds (though hedge funds really don’t count, I had to throw them in there).

Passively Managed Funds

Passive funds are index funds, funds that don’t have a manager and management board actively making decisions on what investments to pursue. They don’t spend time researching companies or interviewing CEOs, they simply track an index such as the S&P 500 as closely as they can. Vanguard’s S&P 500 fund, the Vanguard 500 Index (VFINX), has an expense ratio of 0.18%. Fidelity’s S&P 500 fund, the Fidelity Spartan 500 Index, has an expense ratio of 0.10%.

Actively Managed Funds

Active funds are those mutual funds that have a manager and management team leading the way on deciding which investments to pursue. These funds generally have higher expense ratios, starting in the 1-1.5% range, simply because you need to pay people to conduct the research, make the decisions, and because you need to pay for the trading activity of the fund as well. If you take a look at some of the funds on Money’s Best Mutual Fund List of 2008, you’ll see them run the gamut. The Matrix Advisors Value fund costs 1.11%, Vanguard Windsor II costs only 0.33%, the T. Rowe Price Blue Chip Growth costs 0.81%, and the T. Rowe Price Emerging Markets Stock costs a pricier 1.21%. As you can see, the larger cap funds often charger lower expense ratios because there is less trading involved while the smaller cap and emerging markets funds have slightly higher ratios. Either way, they’re still far higher than the extremely low passively managed funds.

Hedge Funds

Hedge funds are a totally different animal, often charging high fees on both the asset amount and the profits earned. I wanted to throw these funds in there only because they represent the most expensive of the funds you’ll see and their name, hedge funds, don’t really indicate what they do anymore. Hedge funds are now essentially funds for the extremely wealth, thus they have less oversight by the SEC, and their fees are structured in a way that rewards performance. Hedge funds often will have an “expense ratio,” as a percentage of the managed assets, plus a fee based on the profitability of the fund. Something like 2% of assets and then 20% of profits is not unheard of.

There you have it, the three strata of expense ratios in the mutual fund world. It’s important to know where each of those lies so you don’t end up purchasing an actively managed fund that charges you an arm and a leg. When selecting funds, it’s valuable to check out resources like Morningstar to get a good idea of the landscape before selecting an investment.

3 Reasons I Rolled Over My 401(k)

May 12th, 2008  |  Published in 401K  |  2 Comments

I’ve left two jobs in the last five years and each time I rolled over my 401(k) into a Rollover IRA held at Vanguard. In both cases, I rolled over the IRA within a few months of departing my job and I did so for a small handful of reasons.  I know now that I was right as projections in Australia show savings over $30,000 by retirement from rollover into one account.

The number one reason for rolling over my 401(k) into a Vanguard Rollover IRA was simplicity. Why deal with yet another account accessed through yet another website, when I could integrate everything and deal with that account through a great brokerage such as Vanguard? I don’t need more fund balance mailings and fund performance reports, I need my life to be simpler so I can focus on the other things that matter. The end result was that I rolled both of my 401(k)’s into a single Vanguard account (and then I turned on electronic delivery of statements!).

The second reason was for diversification, which is related to simplicity. If I have to access two 401(k)’s in two accounts, it’s much harder for me to control the asset diversification because I couldn’t feasibly see two accounts at once and tweak them concurrently to get the right diversification. One of the 401(k) had some home-brew funds (not created by a major brokerage like Vanguard or Fidelity), so I couldn’t even be certain what the asset allocation within the fund itself was like. It was far easier to pull them all into Vanguard and break them up into Vanguard funds, though any major brokerage like T. Rowe or Fidelity would’ve sufficed as well (I chose Vanguard because I’ve had a long history with them and never been disappointed).

The third reason was cost. At Vanguard, I pay no account maintenance fees whatsoever. If you turn on electronic delivery, the administrative costs go down to $0 and are integrated into the expense ratios of each fund. The funds at Vanguard are much cheaper than the ones at either of my 401(k) plans, though some were pegged to the same benchmarks. Cheaper isn’t necessarily better, much like expensive isn’t necessarily better, but Vanguard has a solid performance record and cost is something I can control.

One account instead of three, an accurate picture of diversification, and controlling the one aspect of mutual fund investing I can control (cost), were the reasons I rolled over my 401(k)’s to a Rollover IRA.

Rolling Over Your 401(k) To Vanguard

April 30th, 2008  |  Published in 401K, IRA  |  Comments Off on Rolling Over Your 401(k) To Vanguard

I’ve rolled over two 401(k)’s into a Rollover IRA at Vanguard and both times the process was absolutely painless. If you’re thinking about taking advantage of Vanguard’s low fee index funds, and other mutual funds, then I think that rolling over a 401(k) is a great way to do it. The process is pretty easy and similar to rolling over to anywhere else.

First, you’ll need to open an account at Vanguard.com, specifically you’ll want this page because it focuses on moving money to Vanguard. If you run into any trouble, you can always call up their retirement specialists at 800-414-1742 and get to a human being in a few minutes. After you follow those instructions, you’ll need to contact your current 401(k) custodian (brokerage firm) to let them know you intend to perform a trustee-to-trustee rollover.

The name you want the check made out to is Vanguard FTC and then have the check mailed either to you, where you will forward it to Vanguard, or directly to Vanguard. The information that is provided to you from Vanguard’s online form should tell you where everything should be sent.

If you already have a Rollover IRA at Vanguard, simply do everything as you did before and include a letter that instructs them on how to divide up the funds. The letter is simple, just write that you want a certain dollar amount or percentage in which funds and you’re all done.

As easy as it should always be. (I don’t know if any other brokerage is easier or harder, I just know that Vanguard’s never been a problem)

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The 150th Carnival of Personal Finance is up!