What's Wrong With Mutual Funds

[Dividend Watcher]

Chuck Jaffe over on Marketwatch had a very interesting article on the problems with mutual funds. You can read it here.

I don't expect the article to be up long because of the mud thrown (maybe I'll be wrong but there's a lot of money at stake here) so here are the bullet points using his subheadings:

• Disclose how different funds are from the index they are measured against.
  
• Stop the gimmicks.
  
• Shut funds where asset growth has affected strategy.
  
• Agree to use a common language.
  
• Kill funds that can’t achieve economies of scale.
  

You can probably read between the lines but the article itself is pretty interesting.

[Jimbo]

DW. I have almost 1k shares in ACEIX. It was just recently transferred from ACEQX (don't know why, it just was)
Have a decent profit from the fund and wonder with the low payout should I sell out and invest the monies elsewhere?
Thanks for your response.
Jim

[Dividend Watcher]

Nice bait but I ain't biting.

Don't know if you paid the 5% load, whether you like paying north of 1.5% of your earnings every year in management fees or like the current 1% (give or take some basis points) income stream or not. I didn't compare the returns with any indices. It's your money.

I noticed it's closed to new investors now.

[Jimbo]

Sorry to inform, it wasn't bait. I'm not up on all this investing stuff. Seriously don't know the load amount stuff. Just dropped money on it several years ago. I think I'm going to sell the majority of it and invest in some other stuff. I presented this as a question only for some insight from people that know much more about it than I and without an agenda ( like the brokers). Thanks for your time to respond.
Jim

[Dividend Watcher]

Jeepers, thought you were fishing by the way you worded it. I have no clue why it was transferred. I hope it wasn't so they could skim another fee off you.

The load is a sales charge that they take off the top when you first invest. Say you invest $10,000. The management firm takes $500 off the top to pay commissions, etc. and you only invest $9500. To me, that stinks. On top of that, they take over 1.5% every year to pay their ongoing costs. They need to make money too but when many funds charge much less than 1%, that seems high to me.

It depends how you got into it. Some corporations have it in their 401(k) plans and the investment company waives or reduces the charge. Also, some corporations are able to negotiate lower maintenance fees. Of course, I could never pin anyone down on exactly what fees I was paying when I worked for a large corporation with a 401(k).

The growth rate seems on par with what's to be expected. I believe that Morningstar rated it in the top 50 of 400 similar funds as far as performance goes.

I can only speak to what I would do. First, I'd consider any exit/selling fees. That will cut into what you would take away.

Since I am more focussed on creating a dividend stream for retirement and not touching principal until I have to, I'd be looking for individual dividend growth stocks. We've mentioned it here that most dividend growth stalwarts are at the high end of fair value right now so you may want to consider dollar cost averaging into positions. Invest $500 or $1000 or so every few months into stocks that appeal to you. Yes, the initial commission would be steep and on par with the fund fees but you only pay it once. AFL seems to still be undervalued, CVX or COP in the energy field are just slightly above fairly valued right now but they both pay a decent dividend. Coke (KO) is still yielding just under 3% and many consider that a fair benchmark of not grossly valued. Perhaps a REIT such as O, VTR, HCP or DLR would warrant a starting position.

Timing the market is a fools errand for me. I wouldn't be all in cash right now nor would I be jumping in with everything right now. If you are looking for DGI stocks, remember patience and time are on your side.

IIRC, your about the same age as me so there's some time but not loads of it so you don't want to make any drastic changes without thinking it through.

---

Jimbo, I just re-read your original post and had the transfer backwards. The fund you are in now, ACEIX, has an ongoing management fee of 0.79% not 1.53% of the old fund so that's a little better. The income yield is still only about 1.7% and you can certainly do better than that if you're comfortable holding individual stocks. Many have been talked about here.

The problem with making recommendations are they include my biases and may not be a good fit for you.

[Jimbo]

Thanks for the input, again alot to consider. Im also not worried about your bias, we all have one. I just respect and get to reflect on what some of you here have to say about items like this. Everyone has a different opinion of things and not that it would influence to the point i would follow (no im not following the masses off the cliff). To me its just all good feedback. I half expected some feedback from several other people on here with their ideas.

Again, thanks for the input and dont get me worng, i am a straight shooter and not out fishin.

I look forward to gathering more info from you and a few others here.

Jim

[earthtodan]

Agreed with DW here about the general negativity toward load-bearing mutual funds. MF's are the main reason I stopped contributing to my 401k recently.

[EricL]

Been getting disgusted with the one remaining fund I have left as well. If I didn't have the account with a relative of mine I would have made the transfer already.

[Ok Red]

From a long time Mutual Fund investor who no longer invests in them....

The short answer(s) - they cost you money (even the index funds), you have no control over when capital gains are taken, and you won't get any dividend growth because of the constant portfolio turnover.

With that being said, I DO own some international and emerging market index ETFs. It's the only cost efficient way to get exposure to those markets with an appropriate level of diversification (unless you have a LOT of money to invest). But aside from that, no mas.

[Dividend Watcher]

(06-25-2014, 10:36 PM)Ok Red Wrote: With that being said, I DO own some international and emerging market index ETFs. It's the only cost efficient way to get exposure to those markets with an appropriate level of diversification (unless you have a LOT of money to invest). But aside from that, no mas.

That's probably the only time I would consider a mutual fund or ETF. I had VWO for a while but then it just sat there and the yield was low so dumped it as I got more into DGI. Many markets just don't have the regulation nor transparency the U.S. has so had to trust someone that had more experience and "boots on the ground". Have to watch the tax treaties also.

Right now, it's just Canadian banks and telcos plus UL that I feel comfortable with. Large U.S. multi-nationals have most of the exposure covered.

[Jimbo]

Now, That there is the kind of useful help that I was looking for from the people in the know.

Hence the reason I asked.

OK, I'll say it (as much as I don't want to sound like a dufuss) I have been investing for quite some time now, not a smart investor, but trying to learn, and what better place to learn some good stuff than here.

As you will see and read from my posts I don't get or understand a lot of the stuff with investing. Have purchased some investing books and read some from the library but most are over my head.

I have been able to pick up some good tips and ideas here and always on the prowl for more.

I think I will sell the majority of the fund (keeping a small amount for fun) and roll that money into something more useful and profitable and able to grow better. Though I will admit it is nice when that capital gains check comes in.

Thanks all for the ideas.

Jim