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Should This Guy Leave VanKampen?

By JLP | May 6, 2008

One thing I have noticed from the Money Magazine mention is that I am getting A LOT more email from people asking for my opinion on various topics. If the subject matter is blog-worthy, I’ll consider writing about it. Not so much because I’m an “expert” but more because a lot of AFM readers are very smart and are typically very helpful. In other words, if I don’t have the answer to a problem, chances are pretty good that a reader will have an answer.

Here is an email I received from a relatively new reader:

Hi.

I’ve been following your blog for a few weeks now and really enjoy the no-nonsense advice you dole out to your readers. I have a question about some ongoing investments I’ve been making.

A friend of mine used to work for Primerica Financial Services and got me into VanKampen 5.75% front-end funds several years ago for both traditional and Roth IRAs. I made an initial investment of several thousand $ and have mostly neglected the accounts over the years, sporadically putting in a few hundred bucks here and there. Last year I vowed to myself to max out my Roth IRA and put in the full 4 grand. That was before I started becoming more financially savvy and looking into no-load funds, etc. Since then I’ve opened up a Vanguard account, put in a grand to get started with the Star fund in my Roth IRA and am contributing $150 monthly (about all I can afford at this point in time).

OK, my question is this – would you recommend that I rollover the VanKampen funds now or wait until early next year when (and if) I get dividends on the $ I put in and hopefully at least recoup the money I put in? At this point, I am down on some funds and up on others that have performed well as of late – but I would still be taking a bit of a hit. For example I bought $300 worth of 1 fund back in December, but as of today I have $291 because of its underperformance and 5.75% front-load. Also, they would be charging me $75 for the fund withdrawal. I’m not sure if it matters, but I have about $29K in those funds all told.

Any advice would be greatly appreciated. (btw, you can skip the disclaimers. I know the difference b/w the word of God and your word; I’m just looking for advice from an unbiased, educated source)

- Ralph in Chicago.

In a follow-up email with Ralph I found out that he was invested in the following funds:

Traditional IRA:

VanKampen Strategic Growth (ACEGX): $12K
VanKampen Equity Inc. (ACEIX): $4K
VanKampen Growth & Inc. (ACGIX): $4K
Total: $20K

Roth IRA:

VanKampen Strategic Growth (ACEGX): $1.6K
VanKampen Equity Inc (ACEIX): $2K
VanKampen Aggressive Growth (VAGAX): $0.7K
VanKampen Small Cap Growth (VASCX): $0.7K
VanKampen MidCap Growth (VGRAX): $1.5K
Total: $6.5K

If It Were My Money…

I wouldn’t worry about leaving VanKampen because you have already paid the loads. In other words, you won’t gain anything by staying with VanKampen and might actually gain something due to the fact that Vanguard’s fees are a fraction of VanKampen’s. I would move it to Vanguard and allocate it like this:

Traditional IRA:

Vanguard Total Market Index Fund (VTSMX): $17K
Vanguard Total International Stock Index Fund (VGTSX): $3K
Total: $20K

Roth IRA:

Vanguard Total International Stock Index Fund (VGTSX): $6.5K
Total: $6.5K

Overall Allocation Between the Two IRAs:

Vanguard Total Market Index Fund (VTSMX): $17K or 64%
Vanguard Total International Stock Index Fund (VGTSX): $9.5K or 36%
Total: $26.5K

The allocations are strange due to the $3,000 minimum for Vanguard funds. Your options open up as your account grows but this initial two-fund portfolio is sufficient. There’s no need to make it more complicated than it has to be. As an alternative, you could use Vanguard’s exchange-traded funds but they would require you to pay commissions for each purchase and each sale. Since you are going to be adding funds on a monthly basis, ETFs probably aren’t the best way to go.

I would contact Vanguard and ask them to help you begin the transfer process. It will most likely take several weeks as companies are notorious for dragging their feet on these kinds of things. I would avoid touching the money as you could be faced with tax consequences.

Those are my thoughts. Best of luck, Ralph.

Topics: Index Funds, Investing, IRAs, Retirement Planning, Roth IRA | 11 Comments »


11 Responses to “Should This Guy Leave VanKampen?”

  1. Travis Says:
    May 6th, 2008 at 2:21 pm

    I am concerned with the direction of this blog. Yes, these VanKampen funds are no good – and yes you should avoid any company who tries to sell you only you their own funds (why would you get all your surgeries at a hospital only specializing in or two areas?).

    BUT – as I mentioned in my previous post with the Rollover client, there is a time and a place for mutual funds.

    Just going off what you recommended for the Traditional IRA: your 5yr standard deviation is now 23.4% higher than the S&P 500 with 8% greater overall risk (beta = 1.08).

    How do you know this client wants to take on more risk than the overall market?? As a CFP, most clients want to take on considerably LESS risk than the market while not sacrificing a lot of performance. Through proper mutual fund selection, many times we create portfolios that outperform the market while offering LESS overall risk than the S&P 500.

    Fees are not the only area to consider! There are many funds out there that have consistently outperformed the market 10, 15+ years while offering less risk for the client.

    You just need a good advisor to find these funds and determine a proper allocation.

  2. sam Says:
    May 6th, 2008 at 3:07 pm

    I think he should compare the cost of remaining in the VK funds with the cost of switching to another fund – in terms of annual fees, termination fees, etc. If it looks like a big savings in switching, then he should consider it. He should also look at moving to another fund within the fund family.

    I faced a similar decision a year or so ago. I had gotten into the VK Pace fund back in the 80′s for my conventional IRA, and put about $15k into it over the years. I was increasingly unsatisfied with the performance of the Pace Fund, lagging the S&P 500 but with relative high annual fees. What I decided to do was transfer from the Pace Fund to the Comstock Fund, which had lower annual fees and a better track record in the market. It was a no cost move and I have been much happier with the performance than before.

    Sure I could have cashed out and gone to a no-load fund, but this move suited me better. I should also mention that most of my retirement money is going into my work 401k and only occasionally do I have money to put into the IRA. And unfortunately I can’t put anything into my Roth IRA. So the IRAs are just sorta sitting there.

  3. james Says:
    May 6th, 2008 at 4:12 pm

    I’m not going to comment on the current or desired allocation. I just want to address what I think the original impetus of his question is.

    He’s in the VanKampens and has already paid the load. Now the amount that he’s paid is completely and utterly irrelevant — it’s a sunk cost. It should have NO bearing on what he does today.

    He should think in terms of his best options with a given amount of money. Option 1 is Vanguard. Option 2 is to “put” his money in VanKampen with no load paid (it’s already been paid).

    James

  4. Steve Braun Says:
    May 6th, 2008 at 6:18 pm

    @James…You are right. The load already paid is a sunk cost that is irrelevant. What matters is the best option going forward. Things to consider are risk tolerance (as Travis notes), asset allocation, diversification, ongoing investment costs, investment performance, etc. Also, even though the person asking the question seems torn between Vanguard and VanKampen, in reality there are many, many other options that could be considered too.

    @Travis…You are right that fees are not the only thing to consider but one of several key factors. I like your comment here, as well as the one you left on the “rollover” post. However, I would change one thing. You are comparing the risks (std. deviation, beta) and returns of the funds/portfolios with the S&P 500. This is not an appropriate benchmark for the funds JLP recommended or the entirety of his 2 fund portfolio. Vanguard Total Stock Index contains many, many mid- and even small-cap stocks that naturally increase the volatility of that fund as well as any portfolio relative to the S&P 500. Also, JLP mixed in a good chunk of international in the portfolio via Vanguard Total Int’l Index. You’re mixing apples and oranges if you compare a portfolio of those 2 funds against the S&P 500 which is entirely U.S. based. Yes, the client’s risk must be considered — no question, that’s a good point — but you just can’t measure everything against the S&P 500 and declare a winner on that basis alone.

  5. bobfin Says:
    May 6th, 2008 at 7:11 pm

    Read the founder of Vaguard, John Bolge’s book, The Little Book of Common Sense Investing. It’s has everything you need to know about investing and the problems with fees. For every 1% in fees your porfolio will be 17% less in 20 years.

  6. Kirk Says:
    May 6th, 2008 at 9:49 pm

    There are three factors that make up your return: asset class performance, fees, and taxes. No one can control how the asset classes perform, but we can control fees and taxes.

    @ Travis – picking a fund that can beat the benchmark over a 10 or 15 year period is easier said than done. Sure, you can look back and find funds that have done it…a minority of the funds on the market.

  7. Travis Says:
    May 6th, 2008 at 10:16 pm

    Steve, thanks for the comments. Financial theory suggests you need a common benchmark when comparing two investments (or two portfolios in this case). If you don’t use the S&P 500, I’m not sure what you would use.

    It’s not comparing apples to oranges because each portfolio has the same benchmark. Yes, international is going to be riskier, but that’s exactly the point. Every portfolio needs to be judged based on a common standard (usually the S&P 500) and all factors need to be considered: historical performance, beta, standard deviation, correlation, fees, alpha, etc.

    These last two threads have mainly only been about fees and nothing else. If a manager has added 2% of risk-adjusted return per year (alpha), and you pay only 1% in fees… isn’t this a win-win? For each investment style, I can find you such a fund.

    The major indices have been flat for the past 10 years. They also lost 20-30% in a few months. To most investors I know, this is unacceptable and doesn’t match their risk tolerances. The piece of mind a conservative, well managed mutual fund can bring is priceless to these people. Most investors don’t want to make 1,000%. They want wealth preservation and to be able to sleep at night.

    In my opinion, the financial industry has betrayed the public’s trust. Today, thanks to the likes of Cramer, poor financial advisors, and the latest and greatest way to get rich, everyone is an expert in the stock market.

    It’s this kind of thinking that leads to threads like this where the only aspect considered are the fees the advisor is charging. “Surely, the client is getting swindled” is often the first thought that pops into people’s heads. Sad really (even though it turns out to be true in this situation!). But that’s the fault of the advisor and nothing else.

  8. Don Says:
    May 7th, 2008 at 7:40 am

    @Travis: With a 5.75% front end load, surely the client IS getting swindled.

    I agree with everything you say, except: “Fees are not the only area to consider! There are many funds out there that have consistently outperformed the market 10, 15+ years while offering less risk for the client.”

    Fees, are everything. Call me a Boglehead or say I’m too influenced by Taleb’s “Fooled by Randomness,” but this math teacher doesn’t think that the historical fact that some funds have consistently outperformed is significant when looking forward.

  9. Travis Says:
    May 7th, 2008 at 8:16 am

    Don,

    Per the rollover thread, I ran two portfolios. The 1st I used what the low-fees funds the author recommended (124k Vanguard Total Market and 37k Vanguard Total International). The 2nd I put 124k into his existing Davis New York Venture and 37k into First Eagle Global.

    Vanguard Portfolio (5 yr numbers):
    beta = 1.05
    std dev = 9.90
    average annualized return = 14.73%

    Acitively Managed Portfolio (5 yr numbers):
    beta = .73
    std dev = 7.65
    average annualized return = 18.62%

    So let’s see: by going with the mutual funds with higher fees, not only do you get an average yearly outperformance of 3.89%… but you do it with 30% less risk (beta)! As a math teacher, Don, which portfolio would you rather have?

    Sure, past performance does not guarantee future results, but if you find the right managers who have consistently added risk-adjusted performance throughout the years, there is a good chance this will continue. Besides, the 2nd portfolio is 30% less risky. Even if the managers only MATCH the market’s return, it would still be worth it.

  10. Spokane Al Says:
    May 7th, 2008 at 10:02 am

    I was just catching up with your blog and thought one point deserved a comment. The writer mentioned that one of his decision points is whether it is worthwhile or not to wait and capture the upcoming potential dividend in his investment.

    I suggest that you discuss this issue. We know that in the case of mutual funds, when distributions are paid, the fund NAV drops by a corresponding amount. There is no actual gain, and in the case of a tax deferred account, the entire transaction is a wash. In the case of a non-tax deferred account the result is that taxes are passed from the fund to the investor, again with no net gain to the investor.

  11. Luke Says:
    May 7th, 2008 at 10:09 am

    Why not roll the traditional IRA into the Roth? You don’t have to do it all at once, thereby minimizing the additional income that you declare on your taxes.

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