Don't Touch These With a 10-Foot Pole

There are few "gimmes" in investing. But today, I have advice that will both save and make you money.

First, some background
Half of all American households own equities, according to data from the Investment Company Institute (ICI). Ninety percent of those equity owners invest in stock mutual funds (only about 50% own individual stocks).

If you or anyone you know is included in this group, listen up: You're probably paying too much to invest.

Just say no
How so? Most mutual funds sold through advisors are "load" funds, and according to the ICI, "Professional financial advisors are the main conduit to equity ownership outside employer plans."

A load fund has a sales charge levied by an intermediary -- a broker, financial planner, or advisor. In theory, the sales load reimburses the intermediary for advice and expertise.

So here's what we know: Huge numbers of Americans own funds; the "main conduit" to buy them outside an employer plan is through advisors; advisors charge sales loads ...

... and sales loads all but guarantee poor performance.

Most obviously, the load takes a slice of your assets off the top (or the bottom, in a back-end sales load). Consider the John Hancock Growth Trends (JGTAX):


Representative holdings


Citigroup (NYSE: C  )
Bank of New York Mellon (NYSE: BK  )
WellPoint (NYSE: WLP  )
Aflac (NYSE: AFL  )
Google (Nasdaq: GOOG  )
Oracle (Nasdaq: ORCL  )
Genentech (NYSE: DNA  )

Load (front-end)


Expense ratio


5-year returns vs. S&P 500

(3.67) percentage points

The math is straightforward: If you invested $5,000 in this fund, your actual stake would be just $4,750 ($5,000 minus 5%). (Seems harsh, given all the no-load choices that also have major stakes in Citigroup, Google, and Genentech.)

This information would've been useful -- yesterday
If you're already invested in a load fund and have absorbed the 5% ding, don't tune out. It's about to get a whole lot worse.

It turns out that load funds consistently underperform no-load funds, even when you back out fees.

That's what Tim Hanson and I found in our survey of the best funds of the past decade. Of the top-performing funds, 76% were no-load funds.

Academic research drives the point home even more: In 1998, Professor Craig Israelsen found that "even after ignoring the impact of loads, no-load funds had, on average, significantly higher returns."

Five years later, in a Financial Planning Magazine article, Israelsen studied a different time frame. The result was the same: No-load funds were superior to load funds.

A pattern is developing
Israelsen also shattered the rationale given by load-fund shops for the load funds they sell:

The party line being that -- over time -- a lower expense ratio partly, or perhaps fully, offsets the impact of a front or deferred load. [But] no-load funds ... had expense ratios which, on average, were about 37 basis points lower than the average load fund. ... Thus, the lower cost structure of no-load funds was only partly responsible for their superior performance.

So load mutual funds not only cost you more in fees, they cost you more in lost returns!

There's only one conclusion: Don't touch them with a 10-foot pole.

More to the story
As you go about the business of investing, avoiding loads will get you a long way.

You'll also want to follow the advice of the fund experts at Motley Fool Champion Funds, who look for tenured managers, consistency of style, and low expenses. If you want a shortcut to get going, consider taking a free trial of Champion Funds. You can sample the service for 30 days, see all past picks, and read every back issue -- without forking over a dime.

If you decide to join after your trial, it certainly won't cost you as much as a load fund. To learn more about the free trial offer, click here.

This article was first published Nov. 8, 2007. It has been updated.

Brian Richards does not own shares of any company mentioned in this article. Aflac is a Motley Fool Stock Advisor selection. The Fool's disclosure policy enjoys rich, chocolaty Ovaltine.

Read/Post Comments (0) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 607159, ~/Articles/ArticleHandler.aspx, 10/25/2016 1:44:07 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,184.08 -38.95 -0.21%
S&P 500 2,144.54 -6.79 -0.32%
NASD 5,285.70 -24.13 -0.45%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/25/2016 1:28 PM
AFL $69.64 Down -0.39 -0.55%
Aflac CAPS Rating: *****
ANTM $124.47 Down -0.02 -0.02%
Anthem CAPS Rating: *****
BK $43.36 Down -0.05 -0.12%
The Bank of New Yo… CAPS Rating: ****
C $49.66 Up +0.08 +0.16%
Citigroup CAPS Rating: ***
DNA $94.97 Down +0.00 +0.00%
Genentech CAPS Rating: ****
GOOGL $828.55 Down -7.20 -0.86%
Alphabet (A shares… CAPS Rating: *****
ORCL $38.39 Up +0.12 +0.31%
Oracle CAPS Rating: ****