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Paying a load is akin to throwing away most or all of the supposed
advantage you get from having a salesman choose a fund for you. If it's
true that asset allocation accounts for 95 percent of investment
results over long periods of time, then only 5 percent is left over as
a reward for having the "right" fund and the "right" manager. But even
if a salesman could help you pick that "right" fund, paying him a
commission of 5 percent wipes out the benefit.
When you pay a 5 percent load you lose the opportunity to invest 5
percent of your money forever. When you buy a load fund, the money that
goes to the salesman goes to work for him, not for you. When you invest
in a no-load fund, all your money goes to work for you.
And load percentages are always higher than the quoted figures. For
example in a $10,000 investment if $500 goes to the sales organization
then $9,500 is invested on your behalf. Funds are allowed to call this
a 5 percent commission. In fact, you invested only $9,500, and the $500
load amounts to a commission not of 5 percent but of 5.26 percent on
your real investment.
Load amounts are higher than they look. The effect of your commission
grows over time. If you avoided a $1,000 commission by investing in a
no-load fund, over 25 years you would wind up with nearly $11,000 more
if your money compounded at 10 percent. In other words, the $1,000 load
would, in effect, be an $11,000 load.
The broker who chooses a fund for you may have a reason to prefer that
you buy a poorer-performing fund instead of a top-performing one.
Studies show that funds operated by brokerage houses (naturally, they
are almost exclusively load funds) have poorer average performance than
independent load funds. Yet a broker often earns exotic trips and other
perks, in addition to a higher percentage of the commission, for
selling house funds. So if you buy a load fund from a broker, at least
insist on getting one that is not managed by that brokerage house.
You'll then get more objective guidance-and hopefully better
performance.
On average, load funds charge higher expenses than no-load funds. These
are the expenses that all funds take out of their assets, whether their
investors pay loads or not. In a study that covered thousands of funds,
Morningstar found that the average load fund charges its investors
significantly more than the average no-load fund. Expense ratios among
equity funds averaged 1.1 percent for no-loads and 1.6 percent for load
funds. Among bond funds, the average was 0.6 percent for no-load funds
and 1.1 percent for load funds. Those differences may seem small. But
unlike a load, a fund's expense charge hits you year after year after
year. The longer you own a high-expense fund, the deeper it reaches
into your pockets.
What should you do if you already have a load fund?
You shouldn’t necessarily sell that fund. The reasons for avoiding load
funds cease to apply once you already own one. The reason is simple:
Once you pay the load, your money is gone. Getting out of the fund
won't get it back. Therefore, if you are already in that position,
there is no particular advantage to sell that fund just because of the
load.
You shouldn’t necessarily keep the fund, either. If the fund has a
back-end load, that provision may give you an incentive to leave your
money in that fund. Sometimes, back-end loads are structured so that
the longer you leave your money in the fund, the lower the load. You
should study the prospectus to find this out, or have somebody help you
with it. Or call the fund and ask about your options.
Don't keep a fund just because of its back-end load. Even if you keep a
back-end-load fund long enough to avoid most or all of the load, the
salesperson still got paid the commission. The fund found some way to
extract that money from you to cover its commission cost. This could
account for some of the higher expenses that load funds levy on their
shareholders. And, of course, you may be hit with annual 12b1 fees to
cover marketing costs. If this is the case, then you may be paying
those fees again and again, every year you own the fund.
In summary, the presence of a load is not reason enough to sell or keep
a fund. The decision depends on the details of the load, your own
circumstances and needs, and the quality of the fund itself.
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