Expense Ratio and Annual Return

[GreanBrain]

Hello FIRE friends,

I'm extremely happy to finally join this community and I'm excited to post my first topic. I have been catching up on a lot of readings including Mr. MMM, JL Collins, etc. One thing that I'm convinced of is that I should be investing in index funds and should be looking for a low expense ratio. But when I'm comparing funds on Vanguard and Fidelity, I notice that many funds with low expense ratios (<0.04%) have very similar annual returns. A lot of discussion has been focused on the importance of a low expense ratio, but is that the only most important factor we think about when choosing funds? Should I also consider other factors like return? But when I look at multi-year returns, these numbers are so close that I'm not sure how to choose. I am curious about any suggestions from this community.

Let's say risk is another factor. But I'm relatively young so I'm ready to take (maximize) risks. I still end up with a large number of funds with similar returns.

Background: US-based, turning 30, employed, ~40K investment

Thank you

[ertyu]

Try bogleheads.org as well - it seems to me they are the people who will be able to advise you best.

[xmj]

But when I look at multi-year returns, these numbers are so close that I'm not sure how to choose. I am curious about any suggestions from this community.

Take a look at the funds' biggest components and you'll see it will be the same tech stocks with similar weights.

This doesn't mean you should discard them. Pay the least for market exposure (called "beta" by some) that you can, but do get yourself some market exposure all the same.

What you might look into is what other "factors" exist. Factor investing is a thing and investing into large-caps (what most index fund investing boils down to) is but one strategy.

[2Birds1Stone]

If you're comparing 10 different SP500 index funds, they will all have nearly identical returns, ditto for funds/ETF's that track other index's.

You biggest decision is probably more around what you want your asset allocation/investment portfolio to look like at a macro level. This will be based on several factors including risk tolerance, investment time horizon, desired/necessary rate of return, geographical implications, tax efficiency (account types ex. tax deferred/taxable) etc.

Do remember when looking at returns, even over reasonably long periods of time, things that do well in one market cycle may do poorly in different market cycles.

[Western Red Cedar]

You can check out Portfolio Charts for a good introduction on different portfolios, asset allocation, and the underlying philosophy. It was developed by an ERE forum member:

https://portfoliocharts.com/portfolios/

I think understanding your own psychology, fears, and appetite for risk is one of the most factors when choosing funds and an asset allocation. You can read Morgan Housel's "Psychology of Money" for more on that topic. It pairs well with JL Collins writing on investing.

[thef0x]

Everyone's comments are spot on re picking which fund vs picking your general portfolio allocation, so to add something new:

One cool thing these virtually identical indexes enable is tax loss harvesting your losses while maintaining the same underlying portfolio of assets.

Let's say you lose $5000 on the S&P500 ($VOO) on your most recent principle investment. You can sell your $VOO, realizing the loss against income, and then buy a nearly identical index fund, $SWPPX. You've effectively reduced your taxable income (not taxes, taxable income) by $5000 while continuing to own the same underlying bucket of equities. Many "roboadvisors" do this work for you but it's quite simple to do yourself. If you really hate owning $SWPPX, wait 31 days to ensure your repurchasing is not considered a wash-sale, then buy back into $VOO.

This is one way to beat the average investor <-- tax optimization.

https://corporate.vanguard.com/content/ ... online.pdf