Understand Your Investments

One of the first steps in understanding your path to retirement is to get a handle on what investments you own.  Do you have high priced funds?  Are you stuck because you signed an insurance company contract that specifies egregious fees if you change your mind?

Recently I consulted with 2 school teachers.  They don't make high salaries, and their respective "nest eggs" are a bit meager.  One has approximately $30,000 in IRAs rolled over from previous teaching positions, invested in Franklin Templeton shares  like FKINX, an income fund with a 4.25% load, and an expense ratio of 0.62%.  FKINX is a class A fund.  If you don't know the various classes of mutual funds, read

 The ABCs of  Mutual Fund Classes.

The particular advisor at Franklin Templeton Investments had this teacher, who is in her mid-30s, 70% invested in bonds.  According to the client, the advisor chose the funds and told her he had her invested in the same way he invests his wife's investments!

I don't know the advisor, but I would be willing to bet that he is making a good six-figure income off of the commissions he is getting from putting school teachers and other lower income people in these expensive funds.  I just wonder how he looks in the mirror each day.

To make the story short, I recommended she roll over the funds to Vanguard and invest in their 2045 Life Strategy Fund.  Bottom line:  low expenses, appropriate asset allocation, minimal effort.  The good news is she saw she was headed in a bad direction early on and now has 30 years on a better path!

TO UNDERSTAND YOUR FUNDS, FIND OUT THE TICKER SYMBOLS AND THEN LOOK THEM UP AT WWW.MORNINGSTAR.COM.  If you don't know how to do this, email me and I'll talk you through it!

The second teacher works for a school system that has several insurance companies as providers to their 403(b).  This teacher is 10 years from retirement and has several Equity-Indexed Annuities.  The annuities had returns of between 3% and 6% last year.  Over the same period, a conservative portfolio of 60% stocks/40% bonds achieved a return of approximately 15%.  Just as a reminder, if she wanted to change her mind, liquidate her funds, and try a different approach, she would pay a hefty charge.

Her best alternative, at this point, is to hold the annuities until the charge runs down and then to make a switch.  Her school district also offers TIAA/CREF and Fidelity as providers - both of which offer lower cost, well-diversified funds.  She will use these providers going forward over the next 10 years.

What are you and your family members invested in?  Are you building your nest egg or some broker's/insurance sales guy's nest egg?

Do You Own Load Funds?

Friendly reminder:  For those participating in the online Millionaire Teacher by Andrew Hallam book discussion, chapter 2 reading should start tomorrow.  It will be about the value of time in the investment process.  Commenters are especially welcome.  Now on to the topic of this post.

I run into people all the times whose portfolio is filled with load funds.  And, most don't know (and even those who do don't know) that there is no evidence that paying the extra fees incurred by the load results in superior performance.  To be blunt -  buying load funds is, in most cases, akin to paying the sticker price on a new car.  If that doesn't bother you, then reading the rest of the post is a waste of time.

How can you tell if your funds have loads?  Actually it is easy.  Just go to www.morningstar.com, put in the ticker symbol in the quote box, and you can tell quickly as shown by this example:

CLICK TO ENLARGE

The load for this fund is 2.25%.  How much is paid and when it is paid is an important question and not easily answered.  Some loads are backloads, and a percentage is paid if the shares are paid before a certain period.  Some are paid up front and some are paid as you go - it depends on the class of the share.  All of this is purposely made opaque by mutual fund companies.

As an aside, you may be stymied by not being able to come up with a ticker symbol because you are investing in the proprietary funds of the provider.  In this instance, you have to be a junk yard dog in getting information on the costs you are incurring.  I would recommend asking for any information you are given in writing - this tends to focus the rep on ensuring that he or she is not just talking off the cuff. 

If load funds are held in your 401(k), chances are it could be news to your fund administrator.

The only reliable source of information is the fund provider.  I would suggest getting specific information on how the load works.  This is really important when you go to sell issues or roll over an account.  For example, if you have a backload and you automatically reinvest dividends, then you could pay a sales charge on the reinvested shares when you sell.

My suggestion is to avoid load funds altogether.  If they are all that is offered at your work 401(k), then ask why, unless you want to work until you are in your eighties!

A Load Fund Saga

Nickel -and-Dimeing Away
Nickel-and-Dimeing Away
Load Mutual Funds  Keep Nickel-and-Dimeing Away 
(To the tune of Slip Sliding Away by Paul Simon)

You can't let your guard down.  That's today's lesson.

I've been working on an account, selling class "C" shares of funds after they become long-term, held for more than 1 year.  Why wait? Because then the 1% back load is supposed to go away.

On Schwab, this is pretty easy.  You go to "Positions" and then "Unrealized Gain/Loss" and click dollar amount at "Cost Basis" for the security of interest and get: CLICK TO ENLARGE

Pretty easy right?  Then you add up the "Long Term" position and sell.  Here you would sell 708.656 shares of the fund (706.785 + .429 + 1.442).

Pretty straightforward right?  Actually it isn't.  The fund here is a PIMCO fund, and they charged a redemption fee on the sale - a bit over $80.  It has since been reversed and the money put back in the client's account.

How did it get reversed?  Schwab was contacted and told there should be no fee.  They asked for information on when the security was purchased.  I pointed out that they were given this info when the account opened - otherwise I wouldn't be able to read the info in the table above online.  They came back with some mumbo jumbo about average cost, etc.

You probably know that, when you do your taxes, you can choose FIFO, LIFO or average cost.
Here it's different - at least that's what I told them; but, truthfully, how can you ever know with all of the fine print and legalese attached to every transaction.  I do know what "C" shares are, though.

So, I held the high ground and insisted that the load goes away after 12 months and that the securities had been held for longer than 12 months - THERE SHOULD BE NO REDEMPTION FEE.

They then contacted PIMCO and gave them purchase date information.

PIMCO then returned the redemption fee back into the client's account.  But, I wonder how often this fee is assessed and slips right by an unsuspecting investor?  Secondly, why can't something as simple as this be done right?

IMHO, the load mutual fund industry is killing itself and I, for one, will

...watch while you're lowered
Down to your deathbed
And I'll stand over your grave
'Til I'm sure that you're dead. (Dylan - "Masters of War" - covered by Pearl Jam)
 

My Problem With Morgan Stanley

Going through old financial statements can be a depressing experience for financial advisors - not so much because of what individuals investors did, but because of what was done to them.

This from a 9/06/2006 presentation by Morgan Stanley reps on a SIMPLE IRA:

What is Asset Allocation?

     i. Avoids The Big Mistake
       From 1984 to 2002, S&P 500 - 12.22% annually ( penciled in by employee "-Market")
       Versus Average Equity Fund Investor - 2.57% ( penciled in by employee "-People")
       Versus Yale Endowment - 17.4% ( penciled in by employee "Professionals")

The presentation was made to young professionals.  The young lady whose statements I was reviewing was 23 years old and had less than $10,000 in her account.  She is very skilled in graphic arts but not so much in investing.  She doesn't know the questions to ask.  She didn't know to raise her hand and ask if the Yale Endowment performance was representative of professional asset allocation in general and Morgan Stanley's funds in particular.  She didn't know the difference between load and no load or the different classes of funds.  She would have looked at you blankly if you mentioned a 12B-1 fee.

You can imagine the thinking so carefully crafted by the Morgan Stanley reps as they went through their presentation.  It was basically proven to her that people do poorly and  professionals as represented by Yale's fund hit the ball in the upper deck.  This of course is a lie.  Professionals, on average, underperform over long periods after costs are included.

It's not clear whether she chose the fund or the Morgan Stanley advisor chose the fund, but she ended up with 100% of her small account going into Evergreen Asset Allocation A.  The fund had a front load of 5.5% and an expense ratio in excess of 1%.

Once again, we have to wonder how Morgan Stanley et al. of their ilk sleeps at night.  I'm sure some reps say "very well, thank you" every time they go to the bank.  Some are probably even looking out their windows right now and wondering about the protests taking place in the streets.