Do you really know how to evaluate the right mutual fund for
your investment goals? To look at this
question on whether we are being penny wise and pound foolish, I put the following
statement to a test: Investors should look for low cost, no transaction fee
funds out of the same peer group.
To answer that statement there are a few things to consider. Do you believe that all no load, no transaction fee mutual
funds are created equal? You may want to
take a second look. How about the
thought that it is better to pay a one-time transaction fee when you buy a
mutual fund that offers a lower expense ratio? Ah, well, you may want to reevaluate this as
well. Okay, then should you believe that
a higher expense-ratio mutual fund should be shunned for their lower expense-ratio
options? Umm, well, not always.
I looked at four random mutual funds in the same peer
group. I reviewed their actual
performance after fees. My findings may
surprise you. I have listed the four
mutual funds below (names are withheld to protect the feelings of the loser
funds):
FUND A
|
FUND B
|
FUND C
|
FUND D
|
|
ANNUAL
EXPENSE
|
.50%
|
.10%
|
.09%
|
1.25%
|
TRADE
COST @PURCHASE
|
$0.00
|
$76.00
|
$0.00
|
$0.00
|
TOTAL
FEE ON A $50,000 INVESTMENT
|
$250.00
|
$50.00
|
$45.00
|
$625.00
|
Which fund do you think would have been the best choice (5-year
performance, ending September 10, 2013)?
No peeking! Write
your answer first: Fund A, B, C or D???
The winner is…. Fund D.
Who knew? Buying a mutual fund
with the highest annual expense outperformed its peer group with little or no trading costs and lower annual expense ratios.
So, what should you make of this?
Well, we know that we are told as investors to be patient
over time with your investments. Is 5
years a long enough period? Maybe, but
to be safe, I looked again, and this time looked for 10-year performance of the
same funds (period ending September 10, 2013).
What do you think I found?
And the winner is….Fund D, once again, and by several percentage
points.
Myth busted: Always using a low cost fund expense ratio, or
a no load, no transaction cost fund does not always mean you made the best
choice on a performance basis.
My advice to you, the investor, is not to beware but instead
to Be Aware so that you can make the correct decision.
As always, your BMM team stands ready to assist you in
making these choices whether you are a do-it-yourself investor just needing
occasional guidance from someone or if you prefer to work step-by-step with an
advisor. We have programs to fit all
types of investors. Check us out at www.bersonmoney.com.
To your continued Health & Wealth!
Investment advisory services
are offered through Berson Money Management, a registered investment adviser
offering advisory services in the State of California and in other
jurisdictions where exempted. This communication is not to be directly or
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