Wednesday, July 20, 2016

How I Just Earned a Free Vacation With A Few Clicks

Is this not an AWESOME picture?

It's pretty obvious, but to remove any doubt, it's a picture of a cruise ship off the coast of Alaska.  

I've never been to Alaska, and I've only been on one cruise in my life, but THIS IS WHERE I WOULD LIKE TO BE RIGHT NOW! :)

Wouldn't that be great? In this post I will detail a small way how I just earned a free cruise, albeit in a roundabout way, with a few simple clicks on Vanguard, the infamous investment company, and where I personally keep my mutual funds.  It's an interesting read:

So for those of you who have viewed my Portfolio tab, you'll undoubtedly recongize that I have five mutual funds at Vanguard. Now, I started my passion for dividend investing around 2009. But several years ago I realized that I can get much lower risk, still quality income, and better diversification with mutual funds vs. owning only individual stock holdings.

The problem with mutual funds, though free to buy and sell, have what is called an annual expense ratio, for owning the fund. I imagine most of you know this.  But specifically, to give an example, my Vanguard 500 Index fund has 509 stocks in it (WOW), but charges an annual fee of 0.05% for that diversification. 0.05% is essentially the lowest of expense ratios you'll find. And with the fund I know that I am well diversified, that my return will at least match the market, and that I will be charged a very, very paltry fee for this safety.

Well, the expense ratio for another fund of mine, the Emerging Markets fund, VEIEX, was 0.33%...much higher than the 500 Index of 0.05%, but still very low for it's "category" average - what the average expense ratio for this type of fund is across all companies that offer this type, emerging markets index.   Take a look at this chart below to see the details:

So you can see that over 10 years, by using Vanguard I save $2,572. But you can also see that it still costs me $770.  This is why expense ratios are so critical when evaluating where to put your money in mutual funds. 

So, how did I earn my free vacation? Let's get to it:
Just a few days ago, I converted my VEIEX fund to VEMAX, the Emerging Market 'Admiral' shares that Vanguard offers.  Same exact fund, just a lower expense ratio for those customers with a fund balance of over $10k.  

With VEMAX, the expense ratio is now only 0.15%....about 55% less than what I was paying with VEIEX.

So now the chart looks like this:

You can see that now, over 10 years my cost is only $353.  This is $417 less in fees!  

And here is where it get's good: at the pace I am contributing to this particular fund, I imagine I will add another $10k or so every 10years or less.  (You don't want too much of your portfolio in Emerging Markets, at least that's my logic).  So that would be $834 in savings in the first 10 years, and it will only grow after that. So for example if I intend to start using this fund when I am around 60, that is at least $6,000 in savings from just switching into Vanguard's "Admiral" offering of this fund.

Ok. You may be thinking, $6,000 in 30 years! Who cares. That isn't that much. Well you are right, from one perspective, but keep reading! And still, all I did was make a few clicks. 

But more importantly than anything else, I KNEW ABOUT THE POWER OF MINIMIZING FEES. So here is my takeaway:

Over a lifetime of investing decisions like these, across your entire portfolio, I imagine the results are staggering; even in the hundreds of thousands of dollars in difference.

That is the point of this article.  Sure it isn't a substantial amount in short run.  On the other hand, I did find these prices for a 7-day Alaskan cruise in a few seconds of searching:

So in 10 years, at a minimum I've got a free Alaskan Cruise!

Remember: Minimize your Fees. 

What do you think? Thanks for reading!

Passive Income Dude

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