How to account for sales charges in portfolio calculations?

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overthought
Posts: 108
Joined: Tue Oct 17, 2017 3:44 am

How to account for sales charges in portfolio calculations?

Post by overthought » Sat Oct 28, 2017 8:43 am

For education purposes (both for self and for teaching others), I'm looking for a straightforward way to account for sales charges in portfolio simulations: trading fees, mutual fund loads, etc. This might matter for e.g. teaching somebody why their advisor's recommended mutual fund really is a bad idea, or for sorting out whether a particular broker's no-fee ETF offerings are worthwhile.

Most simple "growth of $10,000" comparisons (Yahoo, TD Ameritrade, etc) don't include sales charges, and it's not clear to me that portfoliovisualizer.com does either. With the latter you can set brokerage fees but those are portfolio- or account-level costs, rather than costs of using particular instruments.

To give an example of why this might matter, consider the following PortfolioVisualizer simulation that compares ABALX vs. a fairly standard 3-fund vanguard portfolio from 1997 to present (limited by VGTSX inception).

ABALX comes out looking really good: it consistently beats the 3-fund on returns (19% higher return over 20 years) while having a similar risk profile (almost 40% bond+cash base, 10% foreign equity, rest domestic equity, better Sharpe and Sortino ratios). However, the simulation doesn't factor in its 5.75% front-load cost, which I can say from past painful experience changes the picture quite a bit. In this very simple case, I could estimate the effects of front end load by running a separate simulation that deposits only $942/month rather than $1000 and then manually comparing results. Doing that drops the final ABALX portfolio value from $746,092 down to $702,819 (vs. 3-fund final value unchanged at $624,795). That's almost $45k in hidden costs over the 20 years (surprisingly, the fund still looks pretty solid, it beats the 3-fund even then).

For somebody investing small amounts monthly, trading fees could have a similar (if smaller) hidden drag on performance.
Last edited by overthought on Mon Oct 30, 2017 9:56 am, edited 3 times in total.

mhalley
Posts: 5138
Joined: Tue Nov 20, 2007 6:02 am

Re: How to account for sales charges in portfolio calculations?

Post by mhalley » Sat Oct 28, 2017 11:06 am

Finra has a tool to calculate the effect of expenses on up to 3 funds, but does not use historical returns and only allows lump sum calculation and you pick the annual return.

http://apps.finra.org/fundanalyzer/1/fa.aspx
This site shows how to make a spreadsheet to calculate the damage of fees.

http://archive.oreilly.com/pub/h/1889

This 401k fee calculator allows for annual contributions, but you have to put in er and return.
http://401kfee.com/how-much-are-high-fees-costing-you/

venkman
Posts: 297
Joined: Tue Mar 14, 2017 10:33 pm

Re: How to account for sales charges in portfolio calculations?

Post by venkman » Sat Oct 28, 2017 11:03 pm

overthought wrote:
Sat Oct 28, 2017 8:43 am
To give an example of why this might matter, consider the following PortfolioVisualizer simulation that compares ABALX vs. a fairly standard 3-fund vanguard portfolio from 1987 to present.
I think you accidentally transposed 2 letters and entered VGSTX (VG Star fund) instead of VGTSX (Total Intl.) in your PV simulation.

overthought
Posts: 108
Joined: Tue Oct 17, 2017 3:44 am

Re: How to account for sales charges in portfolio calculations?

Post by overthought » Mon Oct 30, 2017 9:49 am

venkman wrote:
Sat Oct 28, 2017 11:03 pm
I think you accidentally transposed 2 letters and entered VGSTX (VG Star fund) instead of VGTSX (Total Intl.) in your PV simulation.
Yipes! Good catch. I updated my original post, but the overall picture remains the same. Main difference is that VGTSX inception limits backtesting to 1997 or later, rather than 1987 as previously.

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