a load off in mutual funds
Dear Dr. Don,
I have about $50,000 invested in mutual funds (front
load) with annual expense ratios between 0.8 and 1.2 percent. I have
had these funds for less than a year. Is it advisable to sell them
all and invest in index funds like Vanguard's?
It depends on the funds and what you're looking to accomplish with
these investments. You've already paid the loads and, since it's
common for a front-loaded equity fund to charge between 4.75 percent
and 5.75 percent, you may have already spent $2,375 - $2,875 to
invest the $50,000.
Vanguard's 500 Index (VFINX) has an annual expense
ratio of 0.18 percent. You'll save between 0.62 and 1.02 percent
in annual expenses by switching from your current mix of mutual
funds to this fund. By doing so, your investment performance will
approximate the return on the Standard & Poor's 500 Index. This
index is a market capitalization weighted index of 500 of the most
widely held U.S.-based common stocks. Since the market capitalization
of these 500 stocks represents about 80 percent of the total capital
invested in U.S. stocks, it's a reasonable approximation of the
overall U.S. stock market.
Is the Vanguard 500 Index an appropriate replacement
for your current collection of mutual funds? If you're looking to
match the overall performance of the U.S. stock market by focusing
on large capitalization stocks and excluding small-cap to mid-cap
stocks, bonds, cash, and international investments, the answer is
yes. If you want a more diversified mix of investments with allocations
across asset classes, then you need to mix things up a bit. You
can do that while still keeping an eye on annual expenses and fees.
The front-end sales loads that you paid on your current
portfolio of mutual funds are sunk costs. In deciding to switch
funds within a year of purchasing the funds, you don't have to consider
those costs. That money's spent regardless of where you invest next.
That said, there's no guarantee that a no-load index fund will outperform
your current portfolio, even after considering annual expenses.
Editor's note: Dr. Don Taylor holds a position