When to bail on bad investments

April 2, 2013 9:28 PM

I need advice on when to get rid of some bad investments with deferred sales charges.

In 2012 I took the big step of rescuing our investments from a bank broker to Vanguard. Big props to several other peoples' AskMes for pushing me to do it.

I held off selling four funds in one particular account because they're Class B shares with deferred sales charges. This year, that sales charge would be 3%, next year 2%, etc. I also pay anywhere from 1.54% to 2.76%(!) in expenses each year, versus costs under 0.20% with Vanguard. (Generally speaking, these non-Vanguard funds have underperformed their Vanguard brethren, though I don't know if that's relevant here.)

Is it as simple as saying I should hold the fund with 1.54% expenses for two more years until the redemption charge is lower than the annual expenses? And wait one year to get rid of the 2.76% fund? I'd really like to be rid of these funds, since I hate losing money to active management, but I'd like to take as little hit as possible.

Any advice?

posted by OHSnap to Work & Money (3 answers total)

Seems like a one-time charge of 3% is better than a two-time charge of 1.34% to 2.56%, no?
posted by acidic at 9:35 PM on April 2, 2013 [1 favorite]

Best answer: So your idea about waiting isn't quite right, because you pay the expenses every year but only pay the redemption fee once. If your fund didn't increase in value at all, you could calculate how much money you would have left by multiplying by (1-fee) for each year you pay the expense/fee. For example, if you paid a 2% expense ratio, after 1 year you'd have 1-0.02=0.98 of your money left. If you paid the same 2% again for a second year you'd have 0.98*0.98= 0.96 of your money left. From this you can see that 2 years of a 2% fee is roughly equivalent to 1 year of a 4% fee. You can't always just add up the fees like this, especially if you're dealing with many years or large fees. But if we're just thinking of a couple of years, it's not a horrible approximation. So a year of 1.5% and then a 2% redemption fee is roughly a 2.5% fee total. A year of 2.8% and then a 2% redemption is roughly a 4.8% fee total, which is worse than the 3% you could pay now.

So you could do these calculations, and figure out when to sell that would give you the lowest fees, but this is really only useful if your current funds match the performance you would get from Vanguard. The fact that your funds have lower returns means that it's not just the fees - you're also missing out on investment growth the longer you hold the pricy funds. Therefore, if I were in your shoes I would forget all the fee optimization and switch to Vanguard immediately.
posted by medusa at 12:39 AM on April 3, 2013 [3 favorites]

Medusa is correct. Of course, just because your funds have underperformed V does not mean they will going forward. Still, move the funds. Why support the greedy pigs? Do business with people you like, even admire, as much as you can in this world. Move to V now, don't look back.
posted by jcworth at 4:31 AM on April 3, 2013