Mutual Funds

Mutual funds are great, and many fund companies do a wonderful job. But, like anything else in life, you want to get the biggest bang for your buck. The problem most investors have with choosing the right fund is the huge number of advisors and brokers trying selling them. Obviously, financial advisors at banks, brokerages, and insurance companies are going to recommend mutual funds that either pays them directly or indirectly.

Investors that use advisors who are directly or indirectly compensated by banks, brokerages, and insurance companies are often at a disadvantage to the investors who use independent advisors through discounters, or do their own investing. So, let痴 cut to the chase. Investors should never pay a load to purchase a mutual fund, or pay someone to pick the fund for you.

Mutual funds are broken down into two categories: Funds that have sales charges (Load Funds), and those that do not (No Load). The part your broker may not be telling you is there may be 3 or 4 ways to buy the same fund. Since your Monte Hall broker wants to be paid extremely well, they may not tell you there is door #1, #2, #3 and perhaps door #4. Like the quote in the movie Indiana Jones goes 添ou have chosen wisely� really applies here.

The Load Fund Shell Game

A single mutual fund may have three or four pricing structures. Choose well and all of your money goes to work immediately. Choose poorly, and you could be paying out the nose and receive no possibility for parole for as long as five years. Ouch!

As an example, let痴 use Morgan Stanley Dean Witter痴 Dividend Growth Fund. Since we mentioned it earlier as a negative example, let痴 give it a little credit. After all, it痴 not the funds fault you were put in the 哲o Parole� pricing structure. Also note that the fund is an 的n-House� proprietary product.

The M.S.D.W. Dividend Growth Fund has four ways in which to purchase it: A shares, B shares, C shares, and D shares.

鄭� Shares - 5.75% upfront sales charge.

釘� Shares - 5%/ 5 year def. sales charge (no parole)

鼎� Shares - 1%/ 1 year deferred sales charge (parole in 1 year)

泥� Shares - 0% sales charge

As you can see, the 泥� shares are clearly the best choice for the investor. The investor will rarely hear about 泥� shares since the broker gets very little compensation. The 泥� shares were created to compete against no load funds like Vanguard. Brokerage firms are neurotic about gathering assets, so instead of saying 展e don稚 have that,� they developed an alternative. 泥� shares or no load shares are not advertised, they are used as a means of last resort to capture a client痴 assets. In addition, many firms feel if they can give in a little now, sooner or later the client will generate more revenue down the road.

If you池e tired of all the shell games, and conflicts of interests, the best alternative is to stick with high quality No Load Funds which are offered through discount brokers and independent financial advisors.

No Load Funds

Not long ago, the renowned mutual fund analyzer, Morningstar, did a study on the performance of No Load Funds versus Load Funds. The study revealed that no load funds actually had superior performance over load funds over the last 3 and 5 year periods. So, to be clear, funds that did not compensate the broker or advisor outperformed the funds that brokers pick for their clients. Hummm.

By far my favorite No Load mutual fund group is Vanguard. In this day and age it is important to eliminate as many conflicts of interests from your investment process as possible. Most investment firms are either publicly traded or privately owned by one or more individuals. Vanguard is different: They are client-owned. Helping investors achieve their goals is literally the sole reason for their existence.

Vanguard answers to no other parties (and therefore no conflicting loyalties), make independent decisions様ike keeping costs low謡ith only the investor痴 needs in mind. In fact, even as industry costs have risen over the years, Vanguard's costs have decreased. So when you invest with Vanguard, you get to keep more of your investment returns working for you, a difference that can compound significantly over time.

In this day of hidden expense ratios, the difference to your portfolio can translate into a significant cost advantage. Assume, for instance, that two funds each earned a gross return of 8% for one year: A low-cost fund with an expense ratio of 0.30% would provide a net return of 7.70%; a fund with an expense ratio of 1.30% would have a net return of just 6.70%.

What to do Now:

1) Use the Vanguard Funds as a part of your overall Asset Allocation strategy. I am especially fond of using Vanguard Index Funds (Mid-Cap, Small Cap, and International) in portions of an investor痴 portfolio where individual stock picking is difficult or high turnover is required to achieve results.
2) Go to www.vanguard.com to educate yourself on the various products they offer.
3) Go to the Reports link on the website and click on 滴ow to Be Your Own Broker� to make sure you are sticking closely to your individualized asset allocation model.