Investing Tips

Petite Prospectus?

April 2, 2007

Chuck Jaffe reports on the mutual fund industry's efforts to reduce the size of the distributed fund prospectus:

If you buy a computer, the "quick-start guide" helps you get the equipment up and running without forcing you to learn many of the fine points that may or may not be useful information some day.

The powers behind the mutual fund business want you to get the same kind of jump start when it comes to their products.

Paul Schott Stevens, president of the Investment Company Institute, the trade association for fund companies, called for big changes in fund disclosure this week, specifically suggesting that investors would be better served by ditching the traditional prospectus in favor of a jump-start user's manual, along with instructions on how to access the true prospectus on the Internet.

It's hardly a new idea, but there's one significant difference this time, namely that the Securities and Exchange Commission is receptive to the idea, and the fund industry powers are more anxious than ever to ease their paperwork burden."

We are, generally, in favor of the idea, assuming these slimmer documents contain the information investors need to make buy decisions. The data in a prospectus that is important to the vast majority of investors could fit on about a page and a half, and a standardized sheet that contains just these key points will make identifying quality funds easier. Could save a tree or two to boot. the rest of this article»

What Would Jesus Invest In?

March 13, 2007

Religious funds, a subset of socially responsible mutual funds that invest in accordance with the tenants of a particular faith, are gaining in popularity. Here's a rundown of prominent religious funds, courtesy of Morningstar:

Catholic Funds

Protestant Funds

Islamic Funds


While investing in the religious funds listed in the article might expedite your entry into the hereafter, don't count on them to produce heavenly returns; as a group these funds have a MAXrating of just 39. As the article points out, one of the biggest negatives associated with these funds is their cost. Almost all have above-average expense ratios compared to their secular peers.

Fund Fee Primer

February 26, 2007

Front-end loads, back-end loads, expense ratios, management fees, redemption fees, 12b-1s. If you're confused by all the fees associated with mutual fund investing, you're not alone. But since the amount you pay to your mutual fund company can make a huge difference to your long-term returns, getting fee-wise is something all fund investors need to do. Doug Roberts at bloggingstocks makes you a little smarter with this brief intro.

There are two types of mutual fund fees and expenses -- the single shots and those that are ongoing. The single shots generally consist of one-time charges, like sales fees and redemption fees.

Sales fees or commissions, often referred to as a "sales load," may be charged when you enter the fund (front-end) and when you exit it (back-end). They are usually paid to the mutual fund company, the broker or salesman.

I strongly urge you to avoid investing in funds that charge a sales commission. When a sales commission is charged, possibly 4% to 5%, this means that you must outperform a similar fund without a commission by that amount just to match its performance. This is usually not an easy task. Furthermore, a sales load locks you into the fund. You need to stay in it for a long time to cover this cost and still get a competitive rate of return. When a commission is charged, you never know if your broker or advisor is favoring the fund that is best for you, or the one he stands to profit from the most. Often, if you do some detective work, you can find a similar fund without the commission, sometimes with the same manager.

Redemption fees usually refer to fees charged for early redemption in order to discourage short-term trading and "market timing." These fees are not bad for the long-term investor, as long as they are reinvested into the fund and not pocketed by the fund managers, brokers or salesmen.

With redemption fees, the key is to ensure that the fee is paid to the mutual fund itself. In general, I prefer funds that do not extend their redemption fees longer than three to six months, unless they offer superior performance for their category with a very low expense ratio.

In addition to these one-time charges, there are ongoing fees that are charged every year and impact the performance of the fund, even for the long-term investor. These include the expense ratio and brokerage costs.

The expense ratio is the total annual expenses of the fund, expressed as a percent of assets in the fund. It includes the management fee paid to the mutual fund manager, operating and administrative fees paid to run the fund, and 12b-1 fees used to market and distribute the fund. The general rule with expense ratios is "The lower the better." New funds sometimes have high expense ratios because of their small size. These funds should make every attempt to lower the expense ratio as they grow. This indicates a cost-conscious environment and a desire to put shareholders first."

Diligent fund investors need to look for (and avoid) level loads as well as front and back end loads. Level loads are 12b-1 fees in excess of 0.25% per year. Funds with such ongoing sales commissions will be categorized as "LOAD" on our website (red LOAD graphic) and will not come up in screens if you exclude load funds - even though these funds have no front or back end load


See also:

A Fund Fee We Love
The Worst Mutual Fund Investing Advice Ever
Are You Paying A Sales Load?

Past Isn't Prologue

February 24, 2007

How about a Saturday reminder, via Blodget at Slate, not to invest in a mutual fund based on its past performance?

Most investors have heard the "past performance" warnings before, but like other common mantras, do not heed them. Why not? Because they defy common sense. Above-average fund managers should have beaten the market, while below-average ones should have lagged it. So, all we need to do, the logic goes, is to look at some past performance—and pick a few managers who have put the market to shame.

The first of many reasons why this logic is flawed is that excellent past performance is often the result of something other than skill—namely, chance. In any given period, a random selection of stocks will beat the market about half the time. Similarly, a random selection of fund managers will beat the market about half the time (before costs). As a result, the difference between a supertalented fund manager and an average one is often as hard to discern as the difference between a .350 hitter and a .280 hitter in baseball. Over many seasons, with the help of detailed statistics, the difference is obvious. Over a few dozen at-bats, however, the hitters often look about the same.

Second, strong past performance is often the result of the temporary dominance of a particular investment style: growth stocks in the late 1990s, for example, or value stocks and small stocks from 2000 to 2006, etc. When a particular fund manager's style is in vogue, the fund can post extraordinary returns. These returns can disappear quickly when the market environment changes, however. (If you could predict the future, you could theoretically switch from style to style, but the whole problem with stock-picking, market-timing, etc., is that most people aren't Nostradamus.)

Third, even if you do manage to find a fund whose excellent past performance is the result of skill, something critical to the performance might soon change—leaving you with a frightfully ordinary fund (and facing a big transaction and tax hit if you decide to ditch it)."


Why do we post so many articles warning against the dangers of relying on past performance to make mutual fund investing decisions? Because, believe it or not, past performance is still the number one factor mutual fund investors consider when making buying decisions.

What Not To Do

February 23, 2007

Marshall Loeb provides the list of five big mistakes mutual fund investors make. We provide the commentary.

  1. Chasing performance - Don't buy last year's hot funds. Studies show that funds that are currently at the top of the performance heap have less of a chance of beating the average fund return going forward than funds that did less well.
  2. Paying commission - Don't pay loads. Ever. There are perfectly good no-load alternatives for each fund that charges you 5.75% of your money for the privilege of investing in it.
  3. Paying excessive fund expenses - When it comes to fund expenses, the cheaper the better. Fund expenses eat away at your returns. It's usually the cheapest funds that make you the most money long-term.
  4. Buying funds with high turnover ratios - A high turnover ratio is generally bad for a fund to have because excessive trading produces larger commission fee expenses, higher income and capital gains distributions, and might imply a lack of a clear investing focus by the fund manager. The industry average turnover ratio is 102%. We generally prefer funds that don't exceed 65%.
  5. Having inadequate diversification - Basically, the idea behind diversification is to spread your money among many different investments as the chances of them all going bad at once is pretty remote. Purchasing even a single mutual fund automatically provides a certain level of diversification by taking your money and investing it across all the stocks and bonds the fund owns. The problem is that many mutual funds invest in a single sector or country - technology stocks, financial companies, or Chinese equities, for example - and very often all the companies in a particular sector or industry rise or fall together. Therefore, your best bet is to buy a few different funds that concentrate in entirely different fund categories. And, depending on your risk profile, it is also a good idea to keep a certain percentage of your money in bonds and some in cash.


You can check a fund's performance history, expense ratio, turnover ratio, and whether or not it is a load fund or a no-load fund, by entering its ticker into the Fund-o-Matic. ( is also the only place where you can instantly compare a fund’s expenses to similar funds INCLUDING an adjustment for hidden portfolio-level expenses resulting from trading. Check each fund's MAXrating: Expenses for the complete expense picture.)

See also: MAXuniversity Part III -'s Seven Rules of Mutual Fund Investing.

Are You Paying a Sales Load?

May 21, 2004

If you've know anything about MAXfunds, you know that we think load funds are bad and no-load funds are good. These days, however, determining if you are paying a sales commission when you buy into a mutual fund is more difficult then you may think. There is no boldface text on the application that says "This is a load fund". The load information is hidden in complex fee tables deep in a document most investors don't even glance at, the prospectus.

Mutual funds come in two basic forms: with built in sales commissions (loads) or without (no-loads). Determining which one you are buying can be confusing. Our own informal research has determined most people who own a load fund don't know they paid a sales commission. the rest of this article»

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