Category Archives: Investment Vehicles

Investment vehicles and asset classes.

Leveraged ETF Investing

April 17, 2013

Leveraged ETF Investing (How Not To…)

We are huge proponents not just of ETF’s, but of the best investments for your (or any investors) situation. Sometimes ETF’s are best, sometimes regular old mutual funds are best. Leveraged ETF investing however is never the best! 

The use of leveraged ETF’s can never be a great alternative because by their nature they can’t be used over long periods of time successfully (aside from pure luck, but you’d be better off betting on black or red). Leveraged ETF’s are short term “gambling like” investments. We’re not short term investors, and as such we never recommend leveraged ETF’s.

Leveraged ETF’s are exchange traded funds which seek to deliver a return multiple times that of the underlying index. For example a 2X ETF would seek to give you twice the upside of an index. If the S&P 500 was up 2% on a particular day, you’d hope the 2X S&P 500 ETF was up 4% that same day. If you invested $1,000 in the S&P 500 ETF you’d have $1,020. Likewise with the 2X S&P 500 ETF you’d hope to have $1,040.

It doesn’t quite work like this all the time because of rebalancing. Suppose you run a 60mm leveraged ETF designed to mimic twice the exposure of the Russell 2000. You now control 120mm worth of assets that look just like the Russell 2000, with only 60mm of investor funds. Leveraged ETF investing achieves this multiplication affect through use of derivatives, such as call or put options, equity swaps, etc.

If the Russell 2000 increases by 2% today, the 120mm you control increases by 2.4mm to $122,400,000. So you made 2.4mm on your 60mm portfolio – that’s a 4% return when the Russell 2000 went up by only 2%. Pretty good right?

Of course we didn’t take any taxes or expenses into consideration. Those factors really reduce your returns.

In an up market this sounds pretty great right? But when do the markets go up every day?

In a sideways volatile or downwards market things get a little nasty. Let’s assume the index trades at 100:

 

Day Index Open Index Close Index Return ETF Open ETF Close ETF Return
Monday 100.00 99.00 -1.00% 100.00 98.00 -2.00%
Tuesday 99.00 98.01 -1.00% 98.00 96.04 -2.00%
Wednesday 98.01 97.03 -1.00% 96.04 94.12 -2.00%
Thursday 97.03 96.06 -1.00% 94.12 92.24 -2.00%
Friday 96.06 100.00 +4.10% 92.24 99.80 +8.20%

 

So above you have a flat week for the index. The leveraged ETF however ended up .20% underwater. This doesn’t seem like much, but over time it adds up to large amounts.

Russell 2000 2x Strategy – Leveraged ETF Investing in Small Caps

Here’s a great example I stumbled on which clearly shows that leveraged ETF’s can be disastrous for your financial health because:

  • They are ONLY meant for short term trading activities which is just plain dumb, and
  • They don’t work well for long term holding strategies

Take a look for yourself:

Leveraged ETF Investing in Russell 2000

 

You can see clearly that the Russell 2000 was down just about 4% in 2011. That shouldn’t surprise anyone. But you can also see that the 2x leveraged ETF which mimics the Russell 2000 was down almost 4 times as much to nearly -20%! That’s amazing!

The average ETF investor would assume that if the Russell 2000 was down 4% the 2X leveraged ETF would have ended up -8%. Clearly because of the rebalancing effects that is not the case.

We haven’t even touched on fees and expenses. The internal expense ratios on leveraged ETF’s are usually quite high – 1% or more! Not to mention the trading costs within the portfolio (trading derivatives isn’t cheap necessarily) can be substantial, and the tax ramifications can also detract from your investment returns.

Avoid Leveraged ETF Investing

If you’re a gambler – go for it! Just don’t put any more money than you can afford to lose in leveraged ETF’s. If you’re a long term investor – run for cover! Leveraged ETF’s aren’t for you OR your investment portfolio!

By Greg Phelps

Top 25 Mutual Funds – Kiplinger’s

April 5, 2013

I walked into the office this morning and found this on my desk – Kiplinger’s Top 25 Mutual Funds to invest in. If you’ve read or seen any of my writing you know I’m not a fan of mutual fund ratings or touting services. Most of them just chase last year’s performance, they don’t necessarily follow a solid long term strategy.

Kiplinger's Top 25 Mutual Funds

 

Here’s their list of mutual funds they think will help you “strike it rich!”

Kiplinger's Top 25 Mutual Funds

 

The interesting thing about Kiplinger’s is they don’t necessarily bounce all the mutual funds out of the list and start over, they only replace the ones they want to. We follow a similar investment strategy with InvestPlan and our Portfolio Architect program. We maintain our recommended list and only fire mutual funds and ETF’s which fail our 11 step test created by fi360.

Looks to me like Kiplinger’s chases fund performance. Their best mutual funds are mainly actively managed mutual funds, and as you know active managed mutual funds don’t tend to repeat their past performance.

Only 8% of the top 25% of performers from ’02 to ’06 repeated that same stellar performance over the subsequent 5 years. Investing in actively managed mutual funds because they HAD great performance is a losers game. Chances are staggeringly high they will fail to repeat, and you’re the person that bought in at their highest point!

Chasing performance is one of the worst things you can do. Keeping mutual fund fees low is one of the best things you can do.

The average blended expense ratio for their funds is horribly high. Remember that your investments must overcome their expense ratios just to break even, so I strongly advocate ultra low cost mutual funds and ETF’s.

There are definitely a few great mutual funds on their list. I’m a big fan of DFA mutual funds first however, but the problem is they’re not available to retail investors. Outside of having access to DFA mutual funds, T Rowe Price and Vanguard are the only mutual fund families on this list which have mutual funds which consistently show up on our preferred list of mutual funds.

 

Active Mutual Funds Are Expensive

March 5, 2013

Active Mutual Funds Are Expensive!

If you’ve followed this blog for any length of time you probably already realize we are big proponents of passive investing. There are many reasons – including the fact that passive funds beat active mutual funds most of the time (about 75% of the time based on a recent study.) But there’s another huge reason… active mutual funds are expensive!

Mutual fund fees and expenses always reduce your investment returns. In fact, the mutual fund manager has to make up the commissions, fees and expenses just to break even before you make a single dime! For this reason, the lower the fees and expenses the better for you the investor.

Take a look at all of the active mutual fund fees and expenses:

  • Expenses. The following expenses are all added into the mutual fund or ETF expense ratio. These are NOT specific commissions or trading costs that an investor would incur directly, they are costs which are rolled into what they call the “Annual Report Net Expense Ratio”. The average actively managed stock mutual fund has an expense ratio of 1.64% (source Morningstar data ended 12/31/12). The average passively (or index based) managed mutual fund has an expense ratio of .69% (although.69% is still far too high, our clients pay between .21% and .35% for a balanced diversified portfolio.) Why anyone would pay 2 to 5 times the amount in fees to have an actively managed fund is completely baffling to me! Here are some of the costs that go into that expense ratio for actively managed mutual funds:
    • Trading Costs. Each buy and sell of any stock, bond or other investment asset always has a cost to it. These costs come in the form of commissions on stocks, or possibly mark-downs or mark-ups on bonds. The more the fund manager trades the more costs are incurred. Passively managed funds don’t trade any more than absolutely necessary.
    • The Spread. The spread is the difference between the bid and the ask on a stock price. For example, here’s a current quote for AAPL (Apple) stock:

Bid: $485.21 * 100

Ask: $485.30 * 500

The difference between the bid and ask is the spread. Here’s how it works: If I’m an AAPL SELLER, I can put in a “market” order which will be executed immediately at the bid price. There is buyer somewhere willing to buy my block of 100 shares at $485.21 per share.

If I’m a BUYER, I can put in a “market” order which will execute immediately at the ask price. There are 500 shares for sale at $485.30. I don’t need to buy all 500, generally I can buy less without any problems (a portion of this sellers shares for sale.)

Why is this important to you? The spread is .09 cents per share. That means for each share you purchase, it’s automatically worth .09 cents less if you were to sell it immediately. This may not seem like much, but it all adds up! It especially adds up when active managers are trading excessively.

  • Marketing Costs. All of those big fancy mutual fund and ETF managers have to promote their funds right? You see it on TV all of the time, “our funds beat their Lipper averages blah blah blah.” Those ads aren’t free, and actively managed funds always spend money promoting their funds (far more than passively managed mutual funds.) These marketing costs are embedded in the mutual fund expense ratios.
  • Taxes. More buying and selling not only increases your transaction costs and the spreads paid, but it can possibly increase your taxes as well. In fact in many cases investors will realize capital gain payments they didn’t even earn! “That doesn’t sound right!” you’re thinking, and no it doesn’t. However it is true. If an active mutual fund (and in full disclosure to some extent with their lower turnover passive funds) has multiple buys and sells in a bull market they distribute a great deal of capital gains at the end of the year. If you invested in the mutual fund later in the year you may have enjoyed little or no gains at all (possibly even losses), yet still you’d be required to pay taxes on the capital gains distributed out at year’s end which other investors actually earned.

Active mutual funds always will have the allure of outperformance. There will always be the lucky manager who did great last year – there has to be… statistically it’s impossible to NOT have some stellar performing funds!

But when you look at long term investing, those years of outperformance are few and far between. Fees and expenses are the opposite – they’re a constant every year!

Keep your mutual fund fees and expenses low, and you’ll set yourself up for a great investing experience!

By Greg Phelps

Schwab Slashes ETF Fees

September 24, 2012

ETF Fees Keep Going Lower

It seems there’s a price war across the board in the investment industry.  Investment managers are constantly competing for investment dollars on price.  Mutual fund and ETF fees keep going lower which is great for investors!

Charles Schwab recently reduced the operating expense ratio on their own line of exchange traded mutual funds.  Some of their funds such as the Schwab Broad Market ETF has ETF fees at .04% – or 4 basis points.  That’s amazingly inexpensive!

Schwab has always had relatively low fees if you go direct through their online platform. I’ve found anecdotally in the past that if you use their brokerage services where you actually engage a financial advisor their fees aren’t quiet as competitive.  In fact in the past I’ve found they’re right in the middle of the pack for many managed investment services such as mutual fund wrap accounts.

All in all Schwab is a great custodian.  Cutting the fees even further will prove to be a loss leader for them and garner more market share than they already own.  We still prefer TD Ameritrade for many reasons, but primarily that our private client practice has been well served by them for the last 6 years or so.

Charles Schwab First Franchise Investment Branch

ETF fees aren’t always as low as you’d think!

Make sure you always read the fine print.  Your investment plan should include low cost mutual fund and ETF investments.  Not all mutual funds or ETF’s are created equal however.

The average mutual fund fee is roughly 1.25%.  That’s the operating expense ratio and does not take into consideration any trading costs or commissions.  The average ETF fee is about .50% – or half of one percent.  A very well diversified portfolio such as our moderate plan encompasses over 12,000 stocks across 40 countries with exposure to about 1,000 individual bond positions.  The blended mutual fund and ETF fees on that portfolio stands right around .35% or about 1/3 of one percent.

Mutual fund and ETF fees information is useful to the extent your investment plan is well constructed.  Without a solid foundation it doesn’t matter how much you are or are not paying in investment fees as your chances of achieving your goals are slim.

If you need help building a great investment plan, check out Investment Planning by Portfolio Engineer here.

 

Value Mutual Funds

August 24, 2012

Recently we were asked in the investing forums about value mutual funds.  Rather than post a short answer I thought I would elaborate as this is generally misunderstood by most investors.

Value Mutual Funds

Most investors think a value mutual fund invests in stocks that are undervalued.  Usually this comes from a low price to earnings ratio for the majority of it’s underlying stock holdings.  This is a very simplistic view of value funds.

We define a value mutual fund more as one which invests in beaten down long shot type of companies.  Companies which for whatever reason the market thinks aren’t as good as their growth counterparts.

The more beaten down the company is (for example by price to book valuation) the higher risk it has.  The higher the risk it has the higher expected return it has.  More risk across an entire asset class of investments should deliver higher returns over long periods of time.

Most investors think growth mutual funds are the best place to invest for growth.  In reality, growth mutual funds over time perform worse than value mutual funds.  Remember, the higher the risk (a beaten down group of long shot poor performing companies) associated with a value mutual fund, the higher the return should be over the long run.  Statistics back me up on this, take a look:

Size And Value Mutual Fund Comparison

From the above stats you can see that in the large cap mutual fund space value stocks outperform growth stocks by about 1% from 1927 to 2011.  In the small cap mutual fund space there’s an even larger disparity of nearly 5%.

This DOES NOT MEAN you should switch all of your investments into value mutual funds.  It just means there are benefits of tilting your investment portfolio towards value stocks a bit.

A Value Mutual Fund – T Rowe Price

T Rowe Price Large Cap Mutual Fund

Examples of Value Mutual Fund Investments

The best example I can think of to describe a value mutual fund is the case of WalMart vs. KMart.  I’m a big fan of Dimensional Fund Advisors for their low cost passive approach to investing.  I put their mutual funds on the recommended list for all of my private clients as they consistently perform well on our 11 step Fi360 scrubbing process.

Think about it this way.  If you’re WalMart and you need a loan from the bank – you would get a better interest rate than other companies because your business is sound.  You’re company is stable and profits are growing so you are a lower risk to the bank making the loan.

On the flip side if you’re KMart and need a loan – you’ll pay a lot more in interest.  Your business model is struggling and you’re a higher risk to the bank.

KMart is riskier than WalMart – so WalMart gets the lower interest rate.  Banks are compensated for the extra risk they take – this is the core of capitalism.

WalMart is more of a growth company.  More solid, stable business.  KMart is a value company, struggling high risk high potential return business model.

That hopefully helps illustrate the difference between value and growth mutual funds.  The higher the risk the higher the long term returns should be.  There’s a spot in every investors portfolio for both value and growth investing.

Click here for more information on mutual fund capitalization and style.

Commodity Funds A Bust

August 22, 2012

Commodity Funds Stink!

We took on the task of updating our recommended funds list this morning.  We’re always striving to be cutting edge and most importantly provide the best investment advice based on prudent information and practices.  The problem was we found once again that most commodity funds stink!  It seems every time we go through this exercise commodities are the worst by far.

Our Investment Scrubbing Washed Away Everything!

We follow a very extensive and thorough process – specifically the one created by Fi360 – the Center for Global Fiduciary Standards.  It’s not easy to pass our tests.

It’s not as if performance is a dominant driver (like Morningstar).  There are many other factors like expenses and management style, track record, Alpha and Sharpe ratio etc.  We don’t drive looking in the rear view mirror like the other analysts do.  We look forward.  This scrubbing process is extremely thorough and produces a quality list of investment options.  The problem is commodity funds by and large STINK!

Take a look for yourself.  After two hours we learned almost nothing new (almost!):

Commodity Mutual Funds Overall Are Just Plain BAD!

The first report we ran was looking for the top 40% of commodity funds from a fiduciary perspective (low fees great results good track record etc.).  Guess how many commodity funds were on the list out of 89 possible candidates? 5!

That’s right – a paltry 5 commodity funds to pick from.  Here’s the kicker – all five had minimums over 1,000,000 or no accessibility to the average investor.  That search was worthless…

Keep in mind – we had LOWERED our standards to the top 40% of commodity funds (these were broad basket diversified commodities) just to get the 5.  Normally we don’t even look at a mutual fund unless it’s in the top 20% or 30% of mutual funds in their peer group.

We lowered our standards a bit more for fun – to the top HALF of all commodity funds.  We found TWO MORE FUNDS!  I got a bit frustrated at this point.

After finally just throwing in the towel and looking at ALL COMMODITY FUNDS we found out why.  Some of their performance was just abysmal.  Most of them had fees that were obscene in every sense.  Some commodity funds charge massive up front commissions and some commodity funds charge as much as 6% per year in expense ratio.

The Best Commodity Funds

Turns out that our research in the ETF space was a bit more fruitful.  While we DID in fact find one commodity fund (open end) that met our tough criteria, we only found one.  In the ETF space we found the best commodity funds.  ETF’s are becoming more and more popular – we can see why specifically with commodities.

Because it’s proprietary we can’t share the one commodity fund we liked in this space (check out our investment plans if you’re interested in a full investment planning project.  We can however tell you that clearly most commodity funds absolutely stink.  Even most ETF commodity funds stink – though there are far more viable options in that area.

If you need a commodity fund for added diversification don’t bother scouring the ranks of open ended mutual funds.  We spend tens of thousands of dollars on technology and software and it took us a few hours to find one open ended commodity mutual fund that met our criteria.  Our investment advice instead is to start with ETF’s.  You’re more likely to find a good option in the ETF space.

The Best Investment – Last 10 Years

August 14, 2012

If I were to poll our readers about the best investment over the last 10 years, I’m guessing the answers would vary widely.  So widely in fact I don’t dare go too deep with my guesses, but I would say that the US equity markets, the bond markets, real estate, and Greece were off the list.

The Best Investment of the Last 10 Years

The best investment of the last ten years probably isn’t what you would expect.  Most would expect oil or natural gas possibly.  Maybe gold or precious metals.  A few savvy investors may pick a currency or two (which wasn’t in the running for purposes of this exercise).

Very few investors would say – Latin America!

It’s true – Latin America was the best investment of the last 10 years.  That’s for the period ending 6/30/12 and using annualized returns going back 10 years.  I ran through the exercise because I was curious (and I enjoy investment research).  I didn’t quite know what to expect, and the answer will change every few quarters as other investment asset classes get “hot”.  Next year at this time it may just be gold, I’d say it’s more likely NOT going to be however.

Latin American Mutual Funds

Latin american mutual funds – specifically those from Blackrock, T. Rowe Price ( a favorite of ours), Fidelity and even Oppenheimer did amazingly well going back 10 years.  All of our clients had exposure to Latin America – but none directly through mutual funds like these (more diversified such as those from Dimensional Fund Advisors).

Latin America was the best investment of the last 10 years

Top Performing Mutual Funds

One of our sister sites – Best Mutual Funds – has recently posted the research and parameters behind our search through the Morningstar database.  You can check it out here at Best Performing Funds Last 10 Years.

Returns ranged – but only slightly.  The top performing mutual fund was BlackRock.  They were over 19% average annualized return.

While it would have been nice to have that type of investment return, hindsight is always 20/20.  We’d far prefer having a piece of that pie along with broad diversification to cover the next big winner – not chase the last big winner!  Chasing a sector or country bet like this could have ended up in -19% per year average annualized returns!

Best Mutual Funds 2012 Fiduciary Rankings

August 2, 2012

We do things differently here at InvestmentPlan.com.  We don’t just look at performance or yield – we look at a laundry list of ranking factors to determine the best mutual funds for our recommended list.  One of those factors is how well the mutual fund company managers treat their shareholders.

The Best Mutual Funds 2012, June 30

Here’s how Fi360 – the Center for Global Fiduciary Insights ranks mutual fund managers from a fiduciary standpoint:

  1. Data used for calculations represents mutual fund and exchange-traded fund data from Morningstar® as of June 30, 2012.
  2. Rank / 221 – Rank order of the fund families by % of Scored Funds in the Top Quartile of their Peer Group.  Primary sort by % of Scored Funds in the Top Quartile of their Peer Group.  Secondary sort by Considered in Study.
  3. % of Scored Funds in the Top Quartile of their Peer Group – The percentage of share classes within a  fund family with a three-year track record that have a fi360 Fiduciary Score Quarter in the top quartile of  their peer group.
  4. Quartile – Quartile rank of the fund families sorted by % of Scored Funds in the Top Quartile of their Peer Group.
  5. Considered in Study – The number of share classes in a fund family with at least a three-year track record.
  6. ∆ in Rank – Rank as of March 31, 2012 minus rank as of June 30, 2012.  A positive number indicates an increase in rank (improvement), and a negative number indicates a decrease in rank (decline).
  7. New to List – Indicates that the fund family was not on the prior quarter’s report.  Therefore, it has no  change in rank.  Please note that the fund family may have been on an older report.
  8. ING Funds represents ING Funds and ING Retirement Funds.

We can’t post the entire list of mutual fund families – we can’t give away all of our trade secrets.   But here’s a quick snapshot of mutual fund fiduciary rankings.  Is your fund family on the top of the list?  If they’re not on this page, chances are you may need a full investment portfolio review to see how your mutual funds really stack up!

Fi360 Fiduciary Ranking Methodology

Fiduciary Mutual Fund Rankings

While the list does change, it doesn’t change much over time that we’ve noticed.  Mutual fund managers that treat their shareholders well have built a culture of doing just that.  They go the extra mile, they focus on honesty and integrity, and they deliver what they say they’ll deliver.

If you’re looking at Morningstar ratings, the Forbes honor roll, or the cover of Money magazine for your next mutual fund manager you’re missing the boat.  Any manager can get hot – that’s just statistics.  But for a mutual fund company to stay focused on their shareholders over a long period of time takes work and dedication to excellent client service.

Best Mutual Funds 2012 Q1

April 11, 2012

We’re All About The Best Mutual Fund Investment Advice

So here’s our best mutual fund investment advice – DON’T CHASE MUTUAL FUND PERFORMANCE!  We’d actually far prefer running for cover than chasing mutual fund performance.  It always seems to be a sure-fire recipe for investing disaster.

The fact is the overwhelming majority of the top performing mutual funds FAIL TO REPEAT!  We’ve posted stats on this before, but the odds are staggering.  Investing in the top performing mutual funds just isn’t a wise or prudent investment plan.  We recently uncovered the top 10 performing mutual funds for the first quarter of 2012.

The Best Large Cap Growth Mutual Funds 2012 Q1 are:

 

Mutual Fund Name Mutual Fund Ticker Total Return Q1 2012 Mutual Fund Share Class
Rydex Dynamic NASDAQ-100 2X Strategy A RYVLX 45.83% A
Biondo Focus Investor BFONX 39.69% No Load
Touchstone Sands Capital Select Growth A TSNAX 23.87% A
Baron Fifth Avenue Growth Retail BFTHX 22.69% No Load
Eaton Vance Atlanta Capital Focused Gr A EAALX 21.51% A
Fidelity Advisor Growth Opportunities A FAGAX 21.41% A
Hartford Growth Opportunities A HGOAX 21.36% A
Fidelity Advisor Growth Opportunities T FAGOX 21.36% T
SunAmerica Focused Growth A SSAAX 21.32% A
Fidelity Growth Company FDGRX 21.16% No Load

Avoid the “hot stuff” and you’ll be far more successful over the long-term.  Plan first, then invest, monitor and manage – that’s a recipe for success!

It’s Normal To Want To Own Those Mutual Funds

You’d be abnormal if you didn’t wish you owned them in fact.  Who wouldn’t want to own the best mutual funds?  The problem is investor behavior.  Just because these funds performed well doesn’t mean they’re right for your investment plan.

The fact is investors behave badly.  We commonly chase what WAS the best, and overlook the slow and steady course to success.  It’s all psychological.

The Best Mutual Funds of Q1 2012 - RUN!

The Best Mutual Funds Don’t Really Mean That Much To You

Think about it…  Just because it performed the best doesn’t mean it didn’t take FAR MORE risk to do so?  Is the extra risk really appropriate for your investment plan?

What if these funds have massive tax burdens to them?  Some of the best performing funds have outrageously high turnover and consequently a lot of embedded tax implications.  You can literally buy some of these funds, experience a capital loss for 2012 and STILL OWE TAXES on what the investors who came before you made!  It doesn’t seem fair, but then life’s not fair.  You need to be SMART with your mutual funds!

On a side note, check out Investment Advice for more free mutual fund investment advice.  It’s a good free financial resource.

 

More of the best mutual funds to come in different asset classes!

Mutual Funds A Shares Fees

April 2, 2012

Share Classes Affect Your Mutual Fund Investment Returns and Performance.

Share classes are designated groups within certain stocks or mutual funds which gives them special characteristics.  These characteristics can be something along the lines of voting or resale rights.  With respect to mutual funds, class dictates the way loads (sales fees and expenses) are applied.

The higher the load or commission, the lower the investment return.  Some investors look only for low-cost no-load mutual funds in their investment portfolio strategy to save fees.  These fee savings have a direct correlation to the investors long term investment returns.  The more you pay the less you get!

Mutual fund fees and expenses drain your investment returns

It’s important investors know and understand exactly what mutual fund fees and commissions you’re paying for in your fund investments.  This article covers one of the most popular mutual fund share classes available – the class A share mutual funds.

Class A Share Mutual Funds

A share mutual funds generally have a high front load or commission, and a lower ongoing management fee.  For example, the American Funds Growth Fund of America Class A share (ticker AGTHX) has a 5.75% front load commission.  For every $1,000 you put into this fund, you get $942.50 invested.  That fee or commission represents the amount paid to the financial advisor and investment company for you to invest in the fund.

Generally you’d expect if you invested $1,000 you’d have $1,000 invested.  It’s just not the case with class A share mutual funds.  That commission is lopped right off the top of their investment.

This fund also imposes a 0.68% expense ratio.  Part of that goes to the financial advisor who sells you the mutual fund (a 12B1 fee), the rest to the mutual fund company to manage the fund.  In this $1,000 example that means roughly $7.00 a year disappears in the form of an investment fee.  As the fund grows, that expense ratio remains the same meaning the actual dollar amount increases.

Class A share mutual funds do offer breakpoints however, so the more you invest the lower the up front commission can be.  But those breakpoints for most mutual fund companies are generally at $50,000 or $100,000 and up.

Most mutual fund companies will allow you to aggregate all family funds to reach these breakpoints even if they’re in different mutual funds.  For example you can buy $50,000 of two different American Funds and reach a $100,000 breakpoint to save on the up front commission.  In this $100,000 example the commission drops to 3.50% or $3,500.  Once again, that commission goes mainly to the financial advisor who sells you the fund (and their employer).

There are thousands of no-load mutual fund investments available today.  Anchoring your investment plan with high quality low cost mutual funds is a great investment management strategy, as the fee and commission savings will go directly onto your bottom line!

At a minimum, before investing in any share class of mutual funds you should do your homework and understand what you’re paying, who you’re paying it too and what you’re getting in return for the fees and commissions you’re paying.  A penny saved is a penny earned!

We provide complete investment reviews including a detailed accounting of all mutual fund fees and expenses.