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January 2005 performance review

The Conservative portfolio lost .46% for the month of January. We were too light on longer term bonds to have a positive return in a month when most categories of funds slipped.

Time to Choose a New Broker? - Part II

Last month we shared the unfortunate news that Scottrade is raising their mutual fund buying fees. This month we will go into greater detail about the alternatives to Scottrade. 

December 2004 performance review

The main drivers were utility and foreign stocks. American Century Utility Income was up a whopping 23.8% in 2004, as this formerly out of favor category finally caught investor’s attention. Forward International Small Company – a high risk fund we have at just 5% now – was up 25.5%.

Time to get a new broker?

For Powerfund Portfolio subscribers, the most efficient way to invest our model portfolios is through a so-called “fund supermarket” at a broker like Scottrade. This way an investor following our model portfolios can trade and track the funds from all the different fund families we recommend, all in one place. Unfortunately, using a brokerage platform usually adds a layer of extra costs. As expenses cut directly into your investment returns, it’s important to pay as little for trades as possible. At some brokerage platforms, these fees can be quite expensive. 

Fool’s Gold

12/30/04 - ETFs

One inalienable rule in the mutual fund business is that funds with hot track records bring in the most money. Like it or not, this is a business of performance chasing. But occasionally this law of past performance does not explain investor excitement over a particularly popular fund.

A good example is when Merrill Lynch brought in over a billion dollars into their new internet fund, which they launched in early 2000 – just in time to destroy investor’s money. There was no hot past performance, just clients of the broker who were hungry for Merrill’s expertise in an area that made other investors rich. In this case, the past performance of other funds in the category was enough to bring in investor money.

This year we are seeing another illogical success story in new fund launches, and this one is not even in a particularly hot category.

November 2004 performance review

No funds in this portfolio are issuing a capital gains distribution that warrants the selling of the fund to avoid a tax hit. We do advise new investors who are just adding a stake to wait until after the record date to purchase this portfolio’s funds in a taxable account.

How Mutual Funds Work - Capital Gains

We love mutual funds. Mutual funds provide cheap and easy investment diversification, they're easy to get in and out of, they're highly regulated, and they allow investors access to expert financial guidance at a low price. As investments go, we think that mutual funds are far and away the best option for the vast majority of investors in America.

But there are a couple of things about mutual funds that we don't like. Fund investors never know exactly what they're invested in. Mutual funds sometimes charge fees that are too high. Mutual funds can also hit investors with large and unexpected capital gains distributions.

Ask MAX: Avoid Buying Funds In December?

12/08/04 - Ask MAX

Martha from Ohio asks:

I was told by a friend that I shouldn’t buy mutual funds at the end of the year because I can be hit with additional fees. Is this true?

Your friend was referring to capital gain distributions, which are actually a different animal than ordinary mutual fund expenses (like management fees, expense ratios, or 12b-1’s). But while your friend is right (cap gains do pose a potential risk to investors who purchase a fund near the end of the year), the distribution trap is a hazard that can usually be avoided with a simple phone call.

The Tax Man Cometh

Sure April 15th gets most of the glory, but in the world of mutual funds, tax time is really in December. Why? Because that’s when stock funds typically distribute taxable gains to fund shareholders. Throughout the year, fund managers sell stocks at a profit. Some companies that mutual funds own pay dividends. Each year – usually in December - a fund has to distribute these realized gains and incomes to fund shareholders or face tax penalties. 

October 2004 Performance Review

Utilities are proving to be one of the strongest areas in the market this year. We’ve owned a utilities fund in most of our model portfolios these past few years so we are pleased to see this formerly out of favor area take off.