How to Evaluate Load vs. No Load Mutual Funds
If you have been dealing with mutual funds for any length of time, you undoubtedly have faced the question of which is better: Load Funds or No Load Funds. If you are new to investing, "load" simply refers to the commission paid to the broker selling the fund. "No load" means there is no commission on the purchase or sale.
Most discussions in the past have centered exclusively on performance comparisons. Even rating services like Morningstar have occasionally chimed in with their opinion. However, rather than focusing only on performance, there are some other issues I consider far more important:
Who is selling load funds and why? Most load funds are being sold through brokerage houses, financial planners and Registered Representatives. With few exceptions, most of those folks operate on the basis of selling as much product as possible. They collect their commissions up front, as a back end charge, or both (usually in the range of 5 - 6%). Whether you make money or not is not their primary concern. What matters most to those operating under this approach is how often you buy-and thereby generate new commissions for them.
Who markets no load funds? No Load funds are either marketed directly by the mutual fund companies or, more commonly these days, offered through discount houses like Schwab, Fidelity, and many others. The advantage to this is that you have an unlimited choice of funds in one place and don't have to open separate accounts for each mutual fund family that you are considering.
Most fee based investment advisors, like myself, have independent relationships with such major discount firms and are able to offer clients just about any no load mutual fund available. They receive no compensation from the firm and only get paid by the client at a pre-determined fee arrangement. Under this arrangement, there is no hidden motivation to sell you a particular fund or to try and sell more in order to get a larger commission.
Which one is right for you? Whether you prefer dealing with someone selling load funds or an advisor getting you into no loads, let me make one thing very clear: You can make money or lose money either way! Why?
Let's assume for the moment that there is no difference in performance between the types of funds-some of either kind will do well and some of either kind won't. What then determines the successful outcome of you buying either a load or a no load fund?
The key is the advice you're getting. And the fact is that many brokerage houses and Registered Representatives tend to be more interested in their profits than yours. Their investment advice is generally centered around Buy and Hold or dollar cost averaging and similar financially questionable recommendations. Hardly ever will you receive advice about when and why you should exit the market, either because of accumulated profits or to limit your losses. Getting out of the market is simply not in their best interest, though it may be in yours.
I must confess that, as a fee based advisor, I am somewhat biased and I prefer no load funds for my clients. I believe that this type of arrangement is best for all parties involved. It allows me to avoid any conflict of interest and to work exclusively for my clients' financial benefit. And the better my clients do, the better I do.
I am able to choose no load funds and make buy decisions solely on the basis of my mutual fund trend tracking methodology. Following its signals, I can get clients into the market or out of it as often as is necessary to maximize profit or protect assets. And because I work with no load funds, other than a very occasional short term redemption fee, there are no transaction charges no matter how many times we move into or out of the market.
If market conditions dictate that we stand aside in a money market for an extended time in order to avoid a bear market (as was the case from 10/13/2000 to 4/28/2003), I can advise that because it is in the best interest of my client. I am always thinking about what will benefit my client, not worrying about lost commissions. (Please see my article "How we eluded the Bear in 2000" at http://www.successful-investment.com/articles12.htm.
Bottom line: Load fund vs. No Load mutual fund shouldn't be the issue. Having a methodical plan and reliable advice as to when to buy and when to sell is far more important and will help you to secure a prosperous financial future.
© by Ulli G. Niemann
About The Author
Ulli Niemann is an investment advisor and has written about methodical approaches to investing for over 10 years. He avoided the bear market of 2000 and has helped countless people make better investment decisions. Subscribe to his free newsletter: www.successful-investment.com; ulli@successful-investment.com
More Resources
Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exitingMore Stocks & Mutual Funds Information:
Related Articles
Economists #2
Economists know more about how the fragments of society work than anyone. In school they are taught to break down the economy into its tiniest parts and to quantify each minutiae so it can become part of a formula.
Where Is The Rabbit?
We need a rabbit!This was a pretty horrible week for the market with two 100-point days and Friday closing on the lows.During these past few days Sir Alan told us things are looking up and the economy is basically strong.
Market Timing
Every broker and financial planner will tell you that you cannot time the stock market. I saw John Bogle, the great seer of Vanguard, on CNBC saying it can't be done.
Complacency Indicator
If you haven't heard of the technical indicator with the stock market symbol VIX it is now time to pay some attention to it. When the number is running low, as it is now, around 15 to 18 it means everyone is happy and thinks the stock market is going to continue up or at least continue on its current path and there is no need to sell anything.
Protectionism
First let's see what protectionism is. According to Mr.
Managing Investing and Stock Market Risks
Reduce your investing and stock market risks by:Setting your sights on the long term, patiently riding with the ups and downs!If you have the time to be patient, you can benefit from time diversification. The more numerous good years for stocks outweigh the bad, pulling your return up.
Tips to Finding Other People's Simple Trading Plans
Did you know you can make money (and a lot of it) by simply modeling someone else's trading plan? Yes, it is true. Unbelievably, there are many of trading gurus doing it RIGHT NOW.
How to Find Value in No Load Mutual Fund Investing
What are you thinking when it comes to your no load mutual fund selections? Are you saving pennies and sacrificing dollars?Are you spending your time looking at expense ratios, analyzing Morningstar ratings and searching for funds with low fees and no 12b1 charges? If you are like most people, you know these things in and out. You've spent hours evaluating them, and your chosen mutual funds cost little to purchase and maintain.
Evaluation I
An insane person cannot evaluate an insane evaluation system.As you know I have been trying to restore sanity to the insane premises Wall Street has been teaching its brokers and you for all these years.
Do You Know What is the Single MOST Critical Mistake in Trading the Stock Market??
Well maybe that's overstating it a little, but it's certainly one of the most important.It is?(drum roll please)? "the need to be right"!Now that probably wasn't what you were expecting.
Investing in the Stock Market
From the book 'The Stockopoly Plan' by the author Charles M. O'MeliaThere are several factors an investor in the stock market should consider:1.
Choosing A Fund
For years I have been saying you must have a fund that is outperforming the S&P500 Index. Well, I've changed my mind.
Shadow Bull
As one of my regular readers you know I have been a stock market bear for the past 2 years and have encouraged everyone to put their money into a money market account or a short-term no-load bond fund and for the more adventurous what is called a bear mutual fund that goes up when the market goes down. Just being in cash as outlined in my book would have saved 40% or more of your money.
The Stock Trading Plan - Why You Must Have One To Trade Successfully
This is the continuing story of our two imaginary traders, Peter and Paul.Peter is a professional trader, Paul is not.
Complacency
During the month of January the Dow Jones Industrial Average, usually referred to as the DOW, had an almost 1,000 point range, most of it down and the average investor has yawned and said 'so what, this has happened many times before'.Is there any reason to worry now?The terrible event of September 11 shocked investors who sold heavily and then watched the market climb back to where it was on September 10.
Is Your Garage Full Of Junk?
I have a 2-car garage. There are nice shelves on one side and a good practical workbench with a vice on the other side.
Different Ways of Buying Stocks
Let's say you are interested in this one company. You read its annual report, like what you see and your calculation indicates that the stock is trading way below its fair value.
Never Fall In Love!
Recently I watched my favorite football team lose a vital game.I simply love this team.
Its A Bull, Its A Bear, Its Suptertrader!
The higher the market goes the more confusing are the "experts". In the September 14 issue of Investor's Business Daily newspaper we find the great prognosticators such as:Sheldon Jacobs, editor of No-Load Fund Investor newsletter quoted that he is recommending having more cash in your portfolio.
Market Psychology
Today we are inundated with tons of information about the economy, stocks, government agencies and foreign governments. They show us charts and graphs of the increase/decrease in oil production over the last 5 years, the amount of maple syrup produced in Vermont for the past century, the time it takes to bounce a signal off the moon and all kinds of other nonsense that we can live without.