I try to sit down quarterly and review my current asset allocation, portfolio value, how each fund is performing and see if I need to do any rebalancing. I must admit that I found I was doing several things for the past year, that in retrospect were not very smart.
I initially spread my investments across an allocation of international, small cap, mid cap and large cap in what I considered an intelligent allocation, without closely examining the fees associated with each fund. This is an error that likely 99% of people make and also quite out of character for me. I’m ruthless on fees when it comes to my personal investing. I tend to buy stocks with the goal of permanent holdings (or at least 10+ yr timeline) and carefully allocate to ETF’s with the lowest possible fees.
In this case I screwed up. Mea culpa. By looking at asset allocation, I completely missed the fees. As you can see below, I was allocating dollars to funds with fees as high as 1.41%. Fees at that level are insane! I’m quite disappointed with Vanguard in regards to the mid-cap, small-cap and international fund.
Let’s examine how much I would have cost myself if I had put money in that small cap for the duration of my career. Assuming $10,000 starting balance and an additional $1,000 per year into this specific fund. We’ll assume the person is 25 and retires at 65.
The difference to the portfolio is huge! If you assume the same average return of 7% for both funds, you will lose an additional $116k due to fees. Small expenses combined with compound interest over long periods of time can have impacts that the average person can’t easily visualize, because the effect is logarithmic rather than linear. Â Calculator from 401kfee.com)
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In the end I reallocated the bulk of my funds in to the 3 highlighted yellow funds. These are all US large cap, which is not the best asset allocation, however only about 1/2 my assets are in my 401k. The rest are in my IRA and trading accounts. In order to properly allocate across asset classes, I view all my funds as a single account and then allocate accordingly, however the large cap percentage of my portfolio is almost completely within my 401k and my IRA and other funds have much heavier allocations toward other asset classes in order to take advantage of the low fee ETF’s available in the market.
Lesson learned. Everyone needs to review their funds quarterly and carefully check the composition of their funds and fees.