mortgage prepaying

[sweeps]

Originally Posted by msnln

Target funds (or lifestyle funds) use their own investment % mix and charge you premium fees for that service. In many cases, they use mutual funds as part of the mix, meaning, for stock portion, they will use stock mutual fund, and for bonds, bond funds. so, in essense, you are paying double fees. One for underlying % mix funds and again for target fund manager.

Not true. The major mutual fund companies only charge you the weighted average of the underlying funds.

Originally Posted by msnln

Sweeps, commission charges are negligible with discount brokers. For instance, I have Interactive broker account that charges penny per share with dollar minimum commission for stocks and etfs.

This is true, but most people either don't trade enough to get ultra-low commissions, or they need more hand-holding than a broker like Interactive provides. Investing in index funds is easy to understand and there are no commissions at all when investing within the company's family of funds.

[msnln]

Sweeps. thanks for correcting me. I only looked into these funds while back briefly for my father because he wanted to have balanced portfolio that was maintenance free so he could enjoy retirement. But I noticed that they charged more than what underlying mutual funds were charging by some 0.30%. Perhaps different funds have different methodology.

as for comission, I used interactive as an example but even mainstream discount brokers like AmeriTrade, Etrade or Scottrade all charge around $10 or less. Obviously if you used full service brokerage, you will be paying a lot more buy why pay more to talk to a salesman whose main interest is to stuff his own pocket.

[Scanner]

I don't however understand why you would use example of Target Funds as an investment vehicle. Target funds (or lifestyle funds) use their own investment % mix and charge you premium fees for that service. In many cases, they use mutual funds as part of the mix, meaning, for stock portion, they will use stock mutual fund, and for bonds, bond funds. so, in essense, you are paying double fees.

MSN,

I picked on them because they seem to be popular around here as a "hands-off" way of building retirement savings. And certainly, you could do a lot worse.

But I agree - I have spoken to the double management fee and have been met with resistance here on that.

But sweeps is correct - a non-managed mutual fund will have the disipline to stay in the sector you are supposed to be in - it just tracks an index and I imagine their cash portion is low.

7% was only on one part of my portfolio ( 1/3 of it) - the silver ETF (SLV) - so don't be too liberal with the congrats and it could be different on Monday.

[kv968]

Originally Posted by Scanner

I know I have an above average tolerance to volatility though. That being said, I think you can mediate volatility somewhat by spreading out a little.

I just see it as duplicative.

Let's say you have an even amount to invest per year - $10,000.

You put $8000 into hubby and wifey's Roth's into a Target Fund that has a 80%/20% stock mix.

You then send an extra $2000.00 to your mortgage.

That's um. . .hold on. . .getting calculator (where's OhioJim? ). . .that's 36% of your savings going into the debt sector ($1600+2000). Now. . .if that's where you want to be. . .fine. . .but that's overconservative IMO for a person who may be in their 30's trying to build wealth.

Although the math is right (nice job there Scanner) I don't feel the extra $2000 you would send to the mortgage should really be considered as "going into the debt sector" when thinking along the lines of your total portfolio allocation. Sure the mortgage is debt, but it's your debt. If you invested in debt (ie. bonds) they would correlate to the market and go up and down accordingly. Your debt (ie. mortgage) wouldn't react to the market. Which in itself could be a good thing, but if you're looking for the bonds (debt) sector of your portfolio to truly offset the equity volatility, a mortgage won't react the same way as bonds. I know that sounds confusing but what I'm saying is that if you're looking for the "typical" correlation of stocks go down, bonds go up/stocks go up, bonds go down, you won't get that with a mortgage. Make sense?

[Scanner]

And yes, a horizon 10 years or less requires a different strategy and you almost have to have bonds in that mix.

I am not anti- "Target" funds - we use one for our kid's college savings through a 529 @ work.

It makes perfect sense - as the 9 year old gets closer to college, we need more bonds in that mix and I don't want to worry about rebalancing every 6 months.

I am just speaking to the very common psychological need around here to pay down their mortgage. There are people here who would want to pay it down even if it was at 1%, that's just the sentimentality of a "frugal" forum.

[Scanner]

KV,

Well, what's the difference if I buy a $2000 bond at 6% with a maturity of 20 years and paying $2000 towards a mortgage at 6% that's 20 years?

Not much, right?

It's just a matter of who owes whom.

[kv968]

Originally Posted by Scanner

But I agree - I have spoken to the double management fee and have been met with resistance here on that.

All of the Target Retirement Funds I've seen don't charge double management fees. Usually the underlying funds bear a proportionate share of the retirement funds expenses since the retirement fund actually saves the underlying fund money due to the reduction in investor servicing costs.

[kv968]

Originally Posted by Scanner

KV,

Well, what's the difference if I buy a $2000 bond at 6% with a maturity of 20 years and paying $2000 towards a mortgage at 6% that's 20 years?

Not much, right?

It's just a matter of who owes whom.

I'm thinking more along the lines of investing in a bond fund where the interest rates will somewhat fluctuate with the market, not an individual bond.

[msnln]

KV, target funds do not actually show double management fees listed but ones I had looked at had higher fees than underlying components. For example, one fund had 45% equity index fund, 45% bond index fund, 5% international index fund and 5% something else. Individually, the fees charged on each fund was between 0.20% for equity index fund to mid 0.50%. (I looked up each component of the target fund) However, as package, fees charged were around 0.80% which leads me to conclude that at the most, if each index funds were bought separately, I would have saved minimum 0.30%. However, I would have to be responsible for rebalancing the portfolio periodically. That is where these target fund folks add value and justify their fees.

[kv968]

Originally Posted by msnln

KV, target funds do not actually show double management fees listed but ones I had looked at had higher fees than underlying components. For example, one fund had 45% equity index fund, 45% bond index fund, 5% international index fund and 5% something else. Individually, the fees charged on each fund was between 0.20% for equity index fund to mid 0.50%. (I looked up each component of the target fund) However, as package, fees charged were around 0.80% which leads me to conclude that at the most, if each index funds were bought separately, I would have saved minimum 0.30%. However, I would have to be responsible for rebalancing the portfolio periodically. That is where these target fund folks add value and justify their fees.

I'm sure there may be target funds that have higher fees than their underlying components, but the ones I've seen have a somewhat weighted average of them as an expense ratio like Sweeps pointed out.

And just for clarification, was the fund that you looked up that had a higher expense ratio than it's underlying funds be Vanguard's 2010 Fund? If so, the expense ratio for that fund is 0.20% not 0.80% and not higher than it's underlying funds.

[jIM_Ohio]

I think this varies.

1) how many years until mortgage is paid off
2) what is the "time value" of the money you would save on mortgage payments
3) how close person is to retirement

For example, I have ran my numbers...

it makes sense for me to pay down our 7.4% 2nd mortgage (30 yr fixed) early. We can send $1200/year to pay this down. Saves us 15 years of payments (time value of the money is QUITE HIGH).

It does not make sense to pay down our 5.75% 1st mortgage (30 yr fixed). The "pay down" would save us 4 years, and this is close to "early retirement", so building up a taxable account to draw down in early retirement over 15 years takes the priority over being "debt free".

I agree to look at paying down mortgage as the conservative portion of an otherwise aggressive portfolio.

[Scanner]

I'm thinking more along the lines of investing in a bond fund where the interest rates will somewhat fluctuate with the market, not an individual bond.

It kind of brings up another subject - why go with bond funds vs. individual bonds?

As you know, I am fairly down on bonds, except perhaps for college investing where I can see the need for a liquid investment that's safe.

I know there's principal risk with any single bond, unless you purchase an insured bond. That's about the only reason I can see going with a bond fund. I know in the past I have said, "Stick it in a muni bond fund." but that's only because I realize the novice to investing doesn't have the wherethal to research muni bonds, their ratings and make a subsequent investment.

I don't know. . .I think market risk, which you have with bond funds, is more of a concern than principal risk, especially, with any decent amount of money, you should be able to spread the principal around.

I'd rather secure a %age.

I say pick bonds over bond funds as a general rule when going with the debt sector investments. But if possible, pick paying down a mortgage over buying a bond.

Of course, there is minimal prinicipal risk when going with gov't bonds too.

[disneysteve]

Originally Posted by Scanner

It kind of brings up another subject - why go with bond funds vs. individual bonds.

I think the answer is the same as why go with stock mutual funds instead of individual stocks.

1. Diversification. You don't want to buy just one or two bonds, so if you have a relatively small amount of money to invest, you are safer buying into a fund and getting instant diversification. If one bond defaults, it doesn't wreck your portfolio.

2. Ability to invest over time. Many, if not most, of us invest a set amount each month over time, either through payroll deduction or on our own. That method lends itself to a fund over invdividual securities. I can't buy an individual bond with $200/month, but I can build a nice stake in a bond fund over time that way.

3. Professional management. Even if you choose a bond index fund, you get the benefit of professional managament of your money. You don't need to do your own research of the credit worthiness of the individual bond issuers.