Monday, November 21, 2005

From Red to Green!

The past month or so, the stock market hasn't been performing well. However, in the last few days, it's just been spiking upward! The little red boxes are becoming greener and greener :D. Since my roth ira and taxable account are both made up of front load mutual funds (5% front load), I was starting out with a loss already before the market has had any effect. But this past week has allowed my small savings to beat the automatic 5% loss and even, go over approximately 2%. Not much but after watching that darn red 5% loss for almost a year, I'm glad it's starting to go into the positive zone.

Talk about front load funds, here's an article I found on by Paul Merrimen, concerning the never-ending debate about investing in Load vs. No-Load Mutual Funds.... the eternal tug of war in the world of Mutual Funds.

Basically, the gist of it is that -

***"Every study on the subject has concluded that over long periods of time there is virtually no difference in returns between the performance of all load funds and all no-load funds-except for the sales commission. "

***The load funds fund the pockets of the broker...not the investor.

***If the load and no-load funds are in a horse race, a load fund is like a horse that has to start a race from far behind.

Invest $10,000 in a no-load fund and you have to pick funds by yourself. But your entire $10,000 goes to work for you. Buy a fund with a 5 percent load and somebody else tells you which fund to buy and does all the paperwork. Except, you now have 5% less than what you could have potentially invested.

If these two funds are equally successful in the future, the load fund will find it hard to catch up. Due to effects of compounding, it will fall farther and farther behind.

***Load funds are sold based promises based on a long-term period. The brokers convince investors that the sales charges will only be a small cost when they are amortized over many years. But life is full of surprises. So, potentially, you will not conquer that load charge if you pull out your money before five to eight years. At least, that's what I've heard.

***Load funds tend to have higher expenses than the no-load funds.

So, why, then did I put in money into my front load American Funds? Basically, I just didn't want to think about it so much at the time, and investing in something is at least better than not investing at all. I, also, liked the fact that during the lean and low years, American Funds did not have big drops like most of other funds. They were consistent.

1 comment:

  1. Good post and you laid out the issue very well. When I found myself with a 'windfall', I put it into Vanguard index funds. The information I've seen indicates that Index funds beat actively managed ones 2/3's of the time- good enough odds for me. Besides the no-load, the fees are in the range of a quarter percent, significantly below industry averages.

    The 'paper' (actually electron) work to set up the funds was trivial, and I got Vanguard talking directly to my bank so transfers are safe and painless. I'm now on a monthly investment program. Vanguard's website is the best setup, intuitive, and user friendly that I've ever seen.