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Dr. Don TaylorTaking 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?
Neela No-load

Dear Neela,
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.

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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 in VFINX.

-- Posted: June 21, 2004




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