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meditation on fees

September 24th, 2007 at 05:41 am

Needed a haircut, a couple of grocery items, and I had to write a check to copay the chiropractor, so I broke down and transferred $100 from the brick and mortar bank savings account - a little buffer against an overdraft fee.

Got a letter from Capital One. They're going to shift my billing cycle backward a few days back to the 16th. No matter, I now don't have any recurring charges on it anyway. I moved the newspaper subscription to the new, WaMu credit card. Sweet justice. I would have had to write a .35 check, but I bought a spare set of bedsheets from Overstock.com. The bill turned into a semi-respectable 50.34$, which I'll pay next week when the paycheck comes in.

Last week I talked with lawyer friend about 403Bs. It turns out that we made similar money moves with our 403B, but for different reasons. I trimmed my stock portfolio a bit and went for cash and bonds because I wanted a bit of safety. 90% stocks is pretty aggressive even during the best of times. I believe that a recession is on its way and I want a bit of ballast for awhile.

Lawyer friend nearly took all of his stocks and put them in the cash money market fund for a different reason. His favorite fund in the 403B, an international one, was eliminated in favor of a different one, which he hated, because of the fee structure. Yeah, so what about that 1.5% fee, lawyer friend ranted, my favorite posted great returns!

My thoughts drifted a bit, and I'm a bit ashamed that I didn't have the heart to explain it to him. Fees are important, and can be in some cases and conditions even more important because fees are inexorable. That fund manager will charge that fee whether that fund has a good year or not. The fee is fine if you're making in the rare instance a 15-20% return (although it means you are making 13.5-18-5% return), not so fine if you are only making 7-8% because you are barely keeping up with inflation, and it just becomes worse and worse - most actively managed accounts don't do as well as an index fund, and you pay for that privilege. Imagine if you lost 20% of your 403B, which often happened right after the dot.com bust. You'd still be charged that fee with the excuse that "imagine if we weren't your manager - your returns would be even worse!" Big Grin

Fees are so important that there is a story about them. An investor met with a stockbroker to perhaps give him his business. The stockbroker gave him the grand tour, showed the investor how properous the firm was, tried to impress the investor even to the point of going to the slip and showing off the stockbrokers' boats. The investor wondered, "where are the investors' boats?" Fees, of course.

Anyway, by that time lawyer friend concluded, "I wish we had more choices." It turns out that lawyer friend's partner could choose up to 650 funds. Hear, hear. At least for me - I figure I could handle it. Big Grin

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