The Investment Scientist

How I Make a Client 17% Wealthier

Posted on: July 16, 2013

17 percent richerI got a new client recently. The first step I took was to totally redo his portfolio. His old portfolio looked something like this.

Fund Symbol        Expense
YAFFX                  1.26%
UMBWX                0.99%
TWCGX                 0.97%
SGRKX                  0.96%
SCETX                  1.20%
RYTFX                   1.39%
ODMAX                 1.36%
OAKIX                   1.06%
OAKEX                  1.41%
…..
AEMGX                 1.31%

Altogether there were 39 funds in his portfolio. I skipped over a bunch in the list above, but anybody who has read my blog for any period of time should be nearly shouting out what’s wrong with this portfolio.

These Fund Expenses are Too High!

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Russell Kinnel, Morningstar’s director of mutual fund research, published a study last August entitled, “How Expense Ratios and Star Ratings Predict Success”.  The results show that expense ratios are the better predictors. Quoting Kinnel, “If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.” 

So here are the funds I replaced his portfolio with.

DFQTX        0.22%
DFTWX       0.49%
DFREX        0.18%
VBTIX         0.07%

I reduced his average fund expense from 1.1% to 0.24%, a saving of 0.86% a year. This is nothing to sneer at. Ten years from now, my client will be 8.6% wealthier and 20 years from now, he will be at least 17% wealthier just by saving of investment expenses alone.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

1 Response to "How I Make a Client 17% Wealthier"

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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