All About Mutual Fund Loads

December 23rd, 2008  |  Published in Fees  |  3 Comments

I avoid mutual funds with loads at all costs.

A load is just another term for a sales commission or sales fee for a mutual fund. It’s paid by the mutual fund to a broker whenever they sell shares of that mutual fund, it’s exactly like a sales commission. It’s a perfectly legitimate way for a broker to make money and many brokers often offer advice free of charge to clients because they can get paid for some recommendations. One of the reasons many people suggest you find a fee-only financial planner or adviser, who charges you by the hour, is because an adviser’s recommendation may be seen as tainted based on who pays the highest commission. Whether you agree or not, I think you can make the argument that someone being paid for their time and not from a fund is more likely to give an unbaised opinion. A commissioned broker isn’t precluded from giving unbiased advice, but play the numbers.

Just so you’re armed with the best information, here are the various types of loads (these all come from the SEC’s list of mutual fund fees):

Sales Loads

Sales loads refer to the commission the mutual fund pays brokers for selling shares of their fund. The SEC doesn’t regulate sales loads but FINRA (Financial Industry Regulatory Agency) limits it to 8.5%, which is lowered if there are other charges. Sales loads come in two varieties, front-end and back-end. Front-end sales load means the investor pays the fee when they purchase the fund. A deferred or back-end sales load is one paid when shares are sold/redeemed.

Beware No-Load Funds

One thing to be wary of with no-load funds is that they may hide it by calling it something else like a redepemption fee (which is just like a deferred sales load), exchange fee, account fee, or purchase fee.

Start Saving with Low Minimum Investment Mutual Funds

December 2nd, 2008  |  Published in Mutual Funds  |  1 Comment

I’m a big fan of Vanguard’s low cost mutual funds but they aren’t particularly friendly to the young and new investor because they often have decently sized minimum investments. Most require $3,000 to start, though their STAR Fund requires a mere $1,000, which is a lot when you consider most people are looking to save a few hundred dollars a month. At $100 a month, it would take two and a half years to accrue the $3,000 needed (or 10 months for the STAR Fund), to open a Vanguard fund. While you could always put it in an online bank and earn a few percentage points while you waited, most people want to jump right in – fortunately there are many companies offering mutual funds with a low minimum investment.

To find one, I recommend using Morningstar’s Mutual Fund Screener. You can set the minimum initial purchase to less than $500, no load only, and expense ratios less than or equal to 1% – that will give you a result set of at least 200 (that’s the limit). For even more granularity, you can set the star rating to 5 and narrow it down to a mere 125 to choose from.

That will give you a head start on your mutual fund investing!

Introducing: Life-Cycle ETFs!

July 10th, 2008  |  Published in Asset Allocation  |  1 Comment

It was only a matter of time before ETFs, or exchange traded funds, came in life-cycle flavors. Brokerages started offering life-cycle mutual funds, or target date and target retirement, a few years ago and they’ve become very popular options for folks who want a simple investment product that does all the work for them. No asset allocation, no rebalancing, the brokerage, in its infinite wisdom, handles all that for you based on the target date of the fund you choose.

Life-Cycle ETFs differ from life-cycle mutual funds in the same way as ETFs in general differ from mutual funds. The cost trade-off is usually in the expense ratio and commission charges. With a mutual fund, you pay a higher expense ratio but have little commissions (for example at Vanguard, you can buy most Vanguard funds without paying a fee). With ETFs, you pay a commission per trade but less in expense ratios.

Otherwise, they’re pretty much the same.

Vanguard LifeStrategy Funds

June 9th, 2008  |  Published in Asset Allocation, Retirement  |  1 Comment

Lifecycle, Lifestyle, Target Retirement… and now LifeStrategy. Are these all the same things? Are they different? Is it just branding at work?

LifeStrategy is Vanguard’s trademarked name for a Lifestyle fund. If you recall the differences between a Lifestyle and a Lifecycle fund, a lifecycle fund is one that changes its asset allocation as time passes. A lifestyle fund, on the other hand, remains static and is like a snapshot in time of a lifecycle fund.

Vanguard added four LifeStrategy funds – Conservative Growth, Growth, Income, and Moderate Growth. The Conservative Growth Fund is 20% short term reserves, 30% bonds, and 50% stocks. The Growth Fund is 0% short term reserves, 10% bonds, and 90% stocks. So you can see, the Growth Fund is significantly more aggressive than the Conservative Growth Fund.

It’s essentially the same thing as a Lifestyle fund, simply wrapped in a different name.


The 156th Carnival of Personal Finance is available at PT Money and my post on Naming Beneficiaries on Retirement Plans was included.

How To Analyze 401(k) Fund Offerings

May 20th, 2008  |  Published in Retirement  |  Comments Off on How To Analyze 401(k) Fund Offerings

If you just opened your 401(k) or are investigating where you should be invested, my advice to you is to keep things as simple as possible. If it’s your first 401(k), or your first time looking at it with this company, it can be a little overwhelming to figure out what you should be doing. If it’s not your first 401(k), you might be worried that your investments aren’t adequately diversified versus your other investments or that you simply haven’t picked the best ones for your financial situation. Regardless of your motivation to analyze your 401(k) fund offerings, the task is still the same and can seem monumental… so let’s keep things simple.

The two things you need to figure out are cost and performance. There are a lot of options, more if your company uses a traditional brokerage to manage the 401(k) because it opens up the full range of Wall Street’s products, but sticking with mutual funds can’t be wrong. Forget active versus passive or ETFs or individual stocks, stick with mutual funds, if you want a low maintenance 401(k), and you’ll be saner for it.

So, with cost you’ll want to see whether you’re getting a good bang for your buck. Passive funds generally have low expense ratios and likely low sales expenses (active funds usually have much higher because there is more activity) and trend with the market. If you’re happy with that, as many are, an index fund is always a good option. If you want the potential for greater gains, you can look at an actively managed fund. Past performance isn’t an indicator of future performance, but what else are you going to base your decision on if not the past? 🙂

Lastly, remember to use tools to see if your diversification is in line. Are you in too much stock? Not enough bonds? Too much international and not enough domestic? Or you could just go with a target retirement or life-cycle mutual fund, they can take care of those details for you (if you trust them!).

Strata of Mutual Fund Expense Ratios

May 19th, 2008  |  Published in Mutual Funds  |  3 Comments

One of the most important characteristics about a mutual fund is its expense ratio. The expense ratio is the cost of running the fund and is charged to cover the expenses of running that fund, usually represented by a percentage of assets. Some of the things the expense ratio covers include, but are not limited to, the investment advisory fee, administrative costs, 12b-1 distribution fees, operating expenses, and paying for the fund manager’s Mercedes-Benz car allowance (just kidding on the last one).

The expense ratio is also one of the easiest things for you to control when you select a fund. You can’t predict the future with respect to returns, but you sure can predict how much of your investment is consumed by the operational expenses of a fund.

So, what are the three strata of mutual fund expense ratios? Passively managed funds, actively managed funds, and hedge funds (though hedge funds really don’t count, I had to throw them in there).

Passively Managed Funds

Passive funds are index funds, funds that don’t have a manager and management board actively making decisions on what investments to pursue. They don’t spend time researching companies or interviewing CEOs, they simply track an index such as the S&P 500 as closely as they can. Vanguard’s S&P 500 fund, the Vanguard 500 Index (VFINX), has an expense ratio of 0.18%. Fidelity’s S&P 500 fund, the Fidelity Spartan 500 Index, has an expense ratio of 0.10%.

Actively Managed Funds

Active funds are those mutual funds that have a manager and management team leading the way on deciding which investments to pursue. These funds generally have higher expense ratios, starting in the 1-1.5% range, simply because you need to pay people to conduct the research, make the decisions, and because you need to pay for the trading activity of the fund as well. If you take a look at some of the funds on Money’s Best Mutual Fund List of 2008, you’ll see them run the gamut. The Matrix Advisors Value fund costs 1.11%, Vanguard Windsor II costs only 0.33%, the T. Rowe Price Blue Chip Growth costs 0.81%, and the T. Rowe Price Emerging Markets Stock costs a pricier 1.21%. As you can see, the larger cap funds often charger lower expense ratios because there is less trading involved while the smaller cap and emerging markets funds have slightly higher ratios. Either way, they’re still far higher than the extremely low passively managed funds.

Hedge Funds

Hedge funds are a totally different animal, often charging high fees on both the asset amount and the profits earned. I wanted to throw these funds in there only because they represent the most expensive of the funds you’ll see and their name, hedge funds, don’t really indicate what they do anymore. Hedge funds are now essentially funds for the extremely wealth, thus they have less oversight by the SEC, and their fees are structured in a way that rewards performance. Hedge funds often will have an “expense ratio,” as a percentage of the managed assets, plus a fee based on the profitability of the fund. Something like 2% of assets and then 20% of profits is not unheard of.

There you have it, the three strata of expense ratios in the mutual fund world. It’s important to know where each of those lies so you don’t end up purchasing an actively managed fund that charges you an arm and a leg. When selecting funds, it’s valuable to check out resources like Morningstar to get a good idea of the landscape before selecting an investment.

Lifestyle vs. Life-Cycle Funds

May 1st, 2008  |  Published in Investing  |  4 Comments

A Lifestyle Fund and a Life-Cycle Fund are two totally different types of mutual funds, despite the presence of “life” in both of their names. In fact, they are so radically different that to invest in one when you meant the other could be classified as a very bad move.

Life-cycle Funds

Life-cycle funds, or target-retirement funds, are mutual funds that have a future target date and adjust its own risk profile from aggressive to conservative as the date approaches. They’re most popular when used in conjunction with retirement, and first introduced with that in mind, but any target date will work (such as children’s educational expenses). The idea is that when the date is far away, the fund will be more aggressive and have a greater share in stocks. As the date nears and income generation and capital preservation as more important, it’ll shift more and more into safer investments such as bonds and commercial paper.

Lifestyle Funds

Lifestyle funds are like a snapshot in time of life-cycle funds. Lifestyle funds are often known as target-risk, meaning they match the risk profile of the investor (or rather the investor selects the lifestyle fund that matches his or her risk profile). Aggressive investors will want an aggressive lifestyle fund, conservative investors will want conservative lifestyle funds, and the lifestyle fund won’t change its risk profile as the investor ages.

As you can see, lifecycle does not equal lifestyle… and you could be in trouble if you pick lifecycle when you meant lifestyle. 🙂

10 Rules: KISS – Keep It Simple Stupid

December 23rd, 2006  |  Published in Investing  |  Comments Off on 10 Rules: KISS – Keep It Simple Stupid

The third tip of Forbes ten rules for building wealth is one that, I think, applies to almost everything in life: keep things simple. Forbes recommends that you choose three or four index funds that will give you some good exposure – that is, a nice mix of risk and reward instead of all in one asset class (though most funds will be a mix of stocks and bonds, they say an ETF is the way to go if you want to dabble in commodities) or geographic area.

One tip that I think is worth investigating are Target Retirement funds that change their allocation over the years, and will automatically rebalance the assets for you, as you get closer and closer to retirement. I think that target retirement funds are definitely very popular nowadays and they are the definition of KISS.

Source: Fortune