If you watch TV or listen to radio, you’ve seen scores of ads for jobs that promise the moon and the stars (financially, that is) by working from the comfort of your home. And, while there are legitimate jobs that allow you to make money from home, you should be extremely careful before answering – and most certainly sending money – in response to one of these ads.
Many of these make money at home ‘offers’ are, at best, a waste of any money you send. One of the most common ‘offers’ is the envelope-stuffing job. One reporter, investigating their legitimacy, purchased 12 such envelope stuffing kits (all claiming potential earnings of $1,500 per week with little effort). Each kit, costing between $20 and $50 apiece, basically directed the purchaser of the kit to recruit others to stuff envelopes for them. Ultimately, the reporter was unable to make any money from any the 12 starter kits purchased.
As noted, there are legitimate jobs that allow you to make money from home. Nevertheless, according to research conducted by Christine Durst, author of "The Rat Race Rebellion," the ratio of apparently worthless ‘offers’ to legitimate opportunities in the home job arena is 42:1.
However, if you are serious and motivated in your desire to find a legitimate work at home business, following are some hints that can at least increase your possibility of success:
--Before you make any payment (either by giving your credit card number or mailing a check) be certain you actually speak to a live person over the phone (rather than just reading a brochure) who answers all the questions you have.
--Be sure to include as part of your questioning, questions about potential problems and difficulties you’ll face with the work at home ‘program’ you’re considering.
--Ask to be referred to people who have worked for (and been successful with) the work at home system you’re thinking of purchasing. And, if you do get such referrals, be certain to contact and talk to these people.
--Ask about refund policies (for any monies you expend). and specifically what steps you’d have to go take to get a refund. (This is especially true if you’re buying a "starter kit" or "information packet" online.)
--Try to see if any specific complaints have been lodged against the company and/or specific home sales product you’re thinking of buying. Start by contacting these two Better Business Bureau sites: http://welcome.bbb.org and www.bbbonline.org
-- Don’t reveal ANY information (other than your credit card or bank account number, if and when you decide to purchase the product/program). Note that you’re better off making payments with a credit card, since they offer you greater protection if the product/program isn’t legit and you decide to seek a refund.
--DO NOT ASSUME a product/program has greater legitimacy because of where its being advertised (i.e. just because the advertisement is on a website you respect, don’t assume this adds any credence to its legitimacy. Rather, as always, do your homework and be very cautious; as the saying goes: caveat emptor).
Following are two sites mentioned on “The Money Show” that are a good place to start your search. HOWEVER, ONCE AGAIN, IT CANNOT BE STRESSED ENOUGH how important it is that you take ALL of the precautions listed above before buying into ANY ‘work-at-home’ business.
--www.womenforhire.com
--www.ftc.gov (then type in “work at home” in the search section. Note – this site includes potential work-at-home opportunities, as well as a number of articles on the potential dangers and pitfalls of such programs)
Saturday, July 26, 2008
Tuesday, July 22, 2008
RETIREMENT QUIZ -- POSTED 7-22-08
If you regularly listen to “The Money Show”– which you should – but, even if you don’t – you probably know that the answer to this basic retirement question: Should I be saving for retirement? is – Yes. However, when it comes to many other basic retirement saving questions, a lot of people are less certain of the answers. So, here’s a quick, True or False, Retirement Quiz (along with the answers) to a number retirement questions you really should know the answer to.
1. True or False: You should only invest in a 401k or 403b plan if your employer matches the amount you invest? The answer: False.
Investing in a 401k, 403b (or any other employer sponsored retirement plan) is one of the best ways to save for retirement. Accordingly, if your employer offers one, save as much as possible in it as you can afford, whether or not your employer matches your contribution. (If your employer does match your contributions, consider the “match” to be ‘icing on the cake’.) Additionally, don’t make the mistake of only contributing an amount equal to the amount your employer matches. Rather, if you can afford it, invest the maximum amount allowed, each year, in your employer sponsored retirement plan.
2. True or False: If you invest the maximum amount allowed in your 401k, 403b or other employer sponsored retirement account, you should not also invest in a Roth IRA?
The answer: False.
Your goal, as we’ve often pointed out, is to – if possible – save 20% of your income (15% if
you’re a teacher, fireman or in another profession that guarantees you a pension when you retire) towards retirement each year. But, in most cases, the maximum amount you can invest in an employer sponsored retirement account each year will be less than 20% of your income. So, if you’re not over the Roth IRA income limit, and you can afford to, by all means, invest in a Roth IRA.
3. Multiple choice: Money invested in which of the following retirement accounts is not tax deductible?
a. 401k
b. 403b
c. SEP IRA
Sorry – trick question: they’re all tax deductible. Money you invest in
a 401k, a 403b and/or a SEP IRA will grow tax deferred, and is taxed when you with the money (at your then tax rate, and, if withdrawn after age 59 ½, without any penalty).
Money invested in a Roth IRA, however, is not tax deductible. But, so
long as you meet all the conditions that money grows tax free and is withdrawn tax-free.
4. True or False. In many cases, investing in a mutual fund that charges a
load is a good idea. The answer: True.
As we’ve pointed out before, all things being equal, if you’re choosing between two funds which both perform well and fit well within your portfolio, than you’re better off choosing the no load fund. But, things aren’t always equal. Your biggest concern is with a fund’s long term net return. And, for various reasons (one, very often occurring – example, is the fact that the only “good” mutual fund choices available to many people in their retirement plan are load funds) sometimes, your best long term net return will be from a load fund (or funds). So, in such cases, investing in the mutual fund (or funds) that charges the load is a good idea.
5. True or False. You should always rollover your regular IRA investments
to Roth IRAs. The answer: False.
In all circumstances, the answer as to whether one should rollover a regular IRA to a Roth IRA will depend on each individual’s situation. However, for most people, doing such a rollover is not a good idea. Why? Basically, two reasons:
– First, the size of the tax bill you’ll have to pay when you do the rollover is usually quite high, and,
– Second, in many cases, all or part of the money needed to pay this tax bill comes from the existing IRA being rolled over. Which means, you’re left with less (very often, a lot less) money growing tax deferred or tax-free towards retirement, which is not a good idea.
1. True or False: You should only invest in a 401k or 403b plan if your employer matches the amount you invest? The answer: False.
Investing in a 401k, 403b (or any other employer sponsored retirement plan) is one of the best ways to save for retirement. Accordingly, if your employer offers one, save as much as possible in it as you can afford, whether or not your employer matches your contribution. (If your employer does match your contributions, consider the “match” to be ‘icing on the cake’.) Additionally, don’t make the mistake of only contributing an amount equal to the amount your employer matches. Rather, if you can afford it, invest the maximum amount allowed, each year, in your employer sponsored retirement plan.
2. True or False: If you invest the maximum amount allowed in your 401k, 403b or other employer sponsored retirement account, you should not also invest in a Roth IRA?
The answer: False.
Your goal, as we’ve often pointed out, is to – if possible – save 20% of your income (15% if
you’re a teacher, fireman or in another profession that guarantees you a pension when you retire) towards retirement each year. But, in most cases, the maximum amount you can invest in an employer sponsored retirement account each year will be less than 20% of your income. So, if you’re not over the Roth IRA income limit, and you can afford to, by all means, invest in a Roth IRA.
3. Multiple choice: Money invested in which of the following retirement accounts is not tax deductible?
a. 401k
b. 403b
c. SEP IRA
Sorry – trick question: they’re all tax deductible. Money you invest in
a 401k, a 403b and/or a SEP IRA will grow tax deferred, and is taxed when you with the money (at your then tax rate, and, if withdrawn after age 59 ½, without any penalty).
Money invested in a Roth IRA, however, is not tax deductible. But, so
long as you meet all the conditions that money grows tax free and is withdrawn tax-free.
4. True or False. In many cases, investing in a mutual fund that charges a
load is a good idea. The answer: True.
As we’ve pointed out before, all things being equal, if you’re choosing between two funds which both perform well and fit well within your portfolio, than you’re better off choosing the no load fund. But, things aren’t always equal. Your biggest concern is with a fund’s long term net return. And, for various reasons (one, very often occurring – example, is the fact that the only “good” mutual fund choices available to many people in their retirement plan are load funds) sometimes, your best long term net return will be from a load fund (or funds). So, in such cases, investing in the mutual fund (or funds) that charges the load is a good idea.
5. True or False. You should always rollover your regular IRA investments
to Roth IRAs. The answer: False.
In all circumstances, the answer as to whether one should rollover a regular IRA to a Roth IRA will depend on each individual’s situation. However, for most people, doing such a rollover is not a good idea. Why? Basically, two reasons:
– First, the size of the tax bill you’ll have to pay when you do the rollover is usually quite high, and,
– Second, in many cases, all or part of the money needed to pay this tax bill comes from the existing IRA being rolled over. Which means, you’re left with less (very often, a lot less) money growing tax deferred or tax-free towards retirement, which is not a good idea.
Tuesday, July 15, 2008
LATEST IDENTITY FRAUD/CREDIT THEFT SCAMS YOU SHOULD BEWARE OF (POSTED 7-15-08)
If, like most people, you either have a credit card or some other type of credit account, than you are almost assuredly aware of the ever-increasing problem of identity fraud/credit theft. Unfortunately, even though consumers continue to become more educated about the problem, identity fraud/consumer theft thieves are constantly at work trying to figure out new ways to steal your identity/credit. Following are some of the newest ways the ‘bad guys’ are currently using to cheat us, and the ramifications of their thievery.
The first involves what we’ll call the ‘slight of card’ trick. Here’s how it works. A person goes, let’s say, to a gym, and after working out, notices that it appears his locker has been broken into. However, after inspecting his clothing and, especially, his wallet, nothing seems to be amiss. Three weeks later, however, he receives his credit card statement from, let’s call it, the “XYZ” credit card company, which lists over $10,000 in charges over the past three weeks, none of which he has made. When he calls the “XYZ” credit card company to complain, he is asked if his credit card has been stolen – to which he replies, no. However, to be certain, he checks his wallet, and to his horror, finds that the “XYZ” credit card in his wallet is an expired credit card from the same company. What happened? Thieves had indeed broken into his locker, stolen his “XYZ” card from his wallet and replaced it with an expired “XYZ” card. Since he seldom used his “XYZ” card, he didn’t notice the switch. And the worst part? In cases like this, since the card holder doesn’t notice the theft, and since the illegal charges are usually made by the thieves in numerous small amounts (thus not triggering any alert to the card holder or the credit card company) the fact that the card has been stolen and the charges are illicit is not reported to the credit card company; as a result, credit card companies, in such instances, are holding the credit card holder responsible for the payment of some or all of the illicit charges!
A similar “scam” is used by criminal minded waiters and waitresses (often with the help of another criminal minded employee). In short, the scam is, when the waiter or waitress returns your receipt for you to sign, while the receipt is correct, the card they return to you is a similar looking, but expired card from the same credit card company. (They then either use your real card illicitly, or sell it.)
Bottom line – not only do you have to keep close track that all of your credit cards are where they’re supposed to be, you have to regularly and carefully check your credit cards to be certain you still have your actual, legitimate, card, including, every time your card is returned to you after being used for a legitimate transaction. Moreover, DO NOT KEEP CREDIT CARDS THAT YOU INFREQUENTLY USE in your wallet or purse (or anyplace else where they could be stole.) Instead, keep them at home, preferably in a lock box or other safe place.
The next scam is actually a variation on one that’s been in use for a while. Here, a store employee takes the credit card you hand them to pay for an item (let’s say at a grocery store or clothing store), then, while waiting for the transaction to be “Approved”, they place your credit card down on the store counter (fairly standard procedure). While waiting for the “Approval” ‘receipt’ to be processed, they take out their cell phone and, it appears, begin to dial a phone call (again, not out of the ordinary behavior). However, in fact, they’re NOT dialing a phone call. Rather, they’re using their cell phone’s camera to take a picture of your credit card (which they can then use later to make illicit charges.) This scam, of course, can be much more difficult to catch.
Bottom line – always be aware of what’s going on around you, and more importantly, check your credit card usage constantly – your best bet check your credit card usage online AT LEAST ONCE PER WEEK (more often if you have the time), and if any charge appears incorrect,, CALL THE CREDIT CARD COMPANY IMMEDIATELY! (Additionally, even with credit cards that you use infrequently and, as suggested above, don’t keep with you, check those cards and their usage – or, hopefully with these cards,
non usage – online regularly.
Finally, for more information in general on identity fraud/credit theft and how to protect yourself from becoming a victim – or deal with the problem if you do become a victim – check the BestMoneyinfo “Consumer Credit Info” page; to access, go to the www.969WTKK.com homepage and click on the “Best Money Info” icon.
The first involves what we’ll call the ‘slight of card’ trick. Here’s how it works. A person goes, let’s say, to a gym, and after working out, notices that it appears his locker has been broken into. However, after inspecting his clothing and, especially, his wallet, nothing seems to be amiss. Three weeks later, however, he receives his credit card statement from, let’s call it, the “XYZ” credit card company, which lists over $10,000 in charges over the past three weeks, none of which he has made. When he calls the “XYZ” credit card company to complain, he is asked if his credit card has been stolen – to which he replies, no. However, to be certain, he checks his wallet, and to his horror, finds that the “XYZ” credit card in his wallet is an expired credit card from the same company. What happened? Thieves had indeed broken into his locker, stolen his “XYZ” card from his wallet and replaced it with an expired “XYZ” card. Since he seldom used his “XYZ” card, he didn’t notice the switch. And the worst part? In cases like this, since the card holder doesn’t notice the theft, and since the illegal charges are usually made by the thieves in numerous small amounts (thus not triggering any alert to the card holder or the credit card company) the fact that the card has been stolen and the charges are illicit is not reported to the credit card company; as a result, credit card companies, in such instances, are holding the credit card holder responsible for the payment of some or all of the illicit charges!
A similar “scam” is used by criminal minded waiters and waitresses (often with the help of another criminal minded employee). In short, the scam is, when the waiter or waitress returns your receipt for you to sign, while the receipt is correct, the card they return to you is a similar looking, but expired card from the same credit card company. (They then either use your real card illicitly, or sell it.)
Bottom line – not only do you have to keep close track that all of your credit cards are where they’re supposed to be, you have to regularly and carefully check your credit cards to be certain you still have your actual, legitimate, card, including, every time your card is returned to you after being used for a legitimate transaction. Moreover, DO NOT KEEP CREDIT CARDS THAT YOU INFREQUENTLY USE in your wallet or purse (or anyplace else where they could be stole.) Instead, keep them at home, preferably in a lock box or other safe place.
The next scam is actually a variation on one that’s been in use for a while. Here, a store employee takes the credit card you hand them to pay for an item (let’s say at a grocery store or clothing store), then, while waiting for the transaction to be “Approved”, they place your credit card down on the store counter (fairly standard procedure). While waiting for the “Approval” ‘receipt’ to be processed, they take out their cell phone and, it appears, begin to dial a phone call (again, not out of the ordinary behavior). However, in fact, they’re NOT dialing a phone call. Rather, they’re using their cell phone’s camera to take a picture of your credit card (which they can then use later to make illicit charges.) This scam, of course, can be much more difficult to catch.
Bottom line – always be aware of what’s going on around you, and more importantly, check your credit card usage constantly – your best bet check your credit card usage online AT LEAST ONCE PER WEEK (more often if you have the time), and if any charge appears incorrect,, CALL THE CREDIT CARD COMPANY IMMEDIATELY! (Additionally, even with credit cards that you use infrequently and, as suggested above, don’t keep with you, check those cards and their usage – or, hopefully with these cards,
non usage – online regularly.
Finally, for more information in general on identity fraud/credit theft and how to protect yourself from becoming a victim – or deal with the problem if you do become a victim – check the BestMoneyinfo “Consumer Credit Info” page; to access, go to the www.969WTKK.com homepage and click on the “Best Money Info” icon.
Monday, July 7, 2008
COLLEGE FINACIAL AID -- CONTINUED... -- POSTED 7-7-08)
We’ve touched on this topic before, but with the credit crunch continuing, it behooves us to touch on it again. First, over the last couple of months, the “media” has continually reported that finding loans and other types of financial aid to pay for college would be much more difficult. Unfortunately, the media (present ‘company’ excluded) has only reported half the story. Yes, it is true that, due to the credit crunch, college financial aid loans from many private lending institutions has dried up. However, financial aid loans for college (and it should be noted, most “financial aid” for college comes in the form of loans) is available and will remain available from Federal government backed sources. In fact, as we noted here in a blog posted on 3-23-08 (“COLLEGE LOAN AVAILABILITY UPDATE”):
[A]nyone who’ll need loans for next year’s academic year should be able to get them, since funds for federally backed college loans will be available to anyone who needs them…[A]s Sara Martinez Tucker, US undersecretary of state made a point of noting when she was in Boston…to speak at Northeastern University, any problems in the private college loan sector haven’t affected any federally backed loan programs (such as Stafford and Parent PLUS loans), and gave assurances that federal funds would be available to those who need them for the upcoming academic year.
Second, in spite of (or, probably more to the point, because of) the continuing credit crunch and the ‘media’s’ reporting on how this has effected college financial aid, more and more so-called experts are advising college students (and, more particularly, their families) to try numerous financial ‘tactics’ – such as refinancing and/or taking a home equity loan on the family home, or transferring money invested in (what are considered her to be good) investment vehicles (such as mutual funds) to (what are considered here to be lousy) investment vehicles (such as annuities) – so as to, supposedly, increase the student’s and their family’s chances of acquiring more and/or better financial aid. The kindest thing that can be said about such ‘advice’ is, don’t listen to it. The more accurate thing to say about this “advice” is that this it is terrible advice.
Advising families to take a (or take a larger) mortgage on their home, or take well-invested money and switch it to lousy investments is horrible advice in and of itself. The fact that in most cases such advice doesn’t work (i.e. in most cases it doesn’t qualify your family for more financial aid, and in the few cases it does, it generally just qualifies your family for more financial aid loans (so, you’re basically being advised to take a loan that you don’ need (a first mortgage or larger first mortgage or a home equity line of credit -- all types of loans -- on your home) so that you can qualify for another type of loan (a college financial aid loan, which, as pointed out, you almost certainly could qualify for anyhow) only serves to make these so-called 'experts’ ‘advice’ that much worse. (Indeed, it would appear that in most cases the only ‘benefit’ of such advice is whatever profit these 'experts' may realize.)
Bottom line: your best 'tactic' is to avoid these so-called experts and do college financial aid research yourself (all of the information needed is available online and through high school college counselors and college financial aid offices. Additionally, be sure to start your research early (the earlier the better, but no later than the prospective college student’s sophomore year in high school.
(For good places to begin researching how to acquire Federally backed college loans in particular and other college financial aid in general, go to www.finaid.org and www.studentaid.ed.gov . Additionally, check out the BestMoneyinfo “College Savings and Financial Aid” page (to access, go to the www.969WTKK.com homepage and click on the Best Money Info icon) for more info on, and numerous links to, other websites with more information on college financial aid in general.)
[A]nyone who’ll need loans for next year’s academic year should be able to get them, since funds for federally backed college loans will be available to anyone who needs them…[A]s Sara Martinez Tucker, US undersecretary of state made a point of noting when she was in Boston…to speak at Northeastern University, any problems in the private college loan sector haven’t affected any federally backed loan programs (such as Stafford and Parent PLUS loans), and gave assurances that federal funds would be available to those who need them for the upcoming academic year.
Second, in spite of (or, probably more to the point, because of) the continuing credit crunch and the ‘media’s’ reporting on how this has effected college financial aid, more and more so-called experts are advising college students (and, more particularly, their families) to try numerous financial ‘tactics’ – such as refinancing and/or taking a home equity loan on the family home, or transferring money invested in (what are considered her to be good) investment vehicles (such as mutual funds) to (what are considered here to be lousy) investment vehicles (such as annuities) – so as to, supposedly, increase the student’s and their family’s chances of acquiring more and/or better financial aid. The kindest thing that can be said about such ‘advice’ is, don’t listen to it. The more accurate thing to say about this “advice” is that this it is terrible advice.
Advising families to take a (or take a larger) mortgage on their home, or take well-invested money and switch it to lousy investments is horrible advice in and of itself. The fact that in most cases such advice doesn’t work (i.e. in most cases it doesn’t qualify your family for more financial aid, and in the few cases it does, it generally just qualifies your family for more financial aid loans (so, you’re basically being advised to take a loan that you don’ need (a first mortgage or larger first mortgage or a home equity line of credit -- all types of loans -- on your home) so that you can qualify for another type of loan (a college financial aid loan, which, as pointed out, you almost certainly could qualify for anyhow) only serves to make these so-called 'experts’ ‘advice’ that much worse. (Indeed, it would appear that in most cases the only ‘benefit’ of such advice is whatever profit these 'experts' may realize.)
Bottom line: your best 'tactic' is to avoid these so-called experts and do college financial aid research yourself (all of the information needed is available online and through high school college counselors and college financial aid offices. Additionally, be sure to start your research early (the earlier the better, but no later than the prospective college student’s sophomore year in high school.
(For good places to begin researching how to acquire Federally backed college loans in particular and other college financial aid in general, go to www.finaid.org and www.studentaid.ed.gov . Additionally, check out the BestMoneyinfo “College Savings and Financial Aid” page (to access, go to the www.969WTKK.com homepage and click on the Best Money Info icon) for more info on, and numerous links to, other websites with more information on college financial aid in general.)
Tuesday, July 1, 2008
LOAD VS. NO LOAD MUTUAL FUNDS – POSTED 7-1-08
Here’s a question that crops up frequently on The Money Show:
‘Isn’t it true that I should only invest in no-load mutual funds?’ The answer is an unequivocal, “No!” Why? Let’s take a look.
Types of Load Funds
First, what exactly is a “load”? Generally, there are two types.
A front-end load (often referred to as an “A” share) is an up-front commission, which covers the cost of paying mutual fund salespeople. It’s a one-time fee – but you will be charged each time you purchase additional shares of the fund. Generally, these fees run between 3 and 5.5%. So, for example, if you invested $2,500 in a fund that carried a 5% up front load, the fee would be $125. If you later invested another $2,500, you’d pay another $125 fee.
A back end load (often referred to as a “B” share) serves the same purpose as a front-end load. But, it’s only charged against money withdrawn before a set period of time. Back end loads generally work on a sliding scale, starting as high as 5.5% on money withdrawn from the fund in the first year, decreasing down to 1% on money withdrawn, usually, in the 5th or 6th year, and (usually) disappearing after that. (Additionally, some funds also sell C shares – a form of “back end” load where you’re charged a sales fee – usually 1% per year – for the entire time you own shares in the fund.)
Choosing Between Load and No-Load Funds
OK, than, since load funds do charge a fee, and, no-load funds don’t), why shouldn’t you avoid load funds and only invest in no-load mutual funds? Well, all things being equal, if you’re choosing between two funds which both perform well and fit well within your portfolio, than you are better off choosing the no-load fund. But, the reality is, things aren’t always equal, so only buying no-load funds is not a good policy. The reason?
Your biggest concern when investing in mutual funds is with a fund’s long-term net return. The problem is, for a large portion of people, choosing only no-load funds while also choosing only the best funds ( i.e. those with the best net returns) available to them often isn’t possible. Why’s that?
First, a large portion of many people’s mutual fund investments are through their company’s retirement plans, and many of these plans only offer funds that charge a sales load. Second, in many cases, the best funds (those with the best net returns) available in a particular arena of investing – for example, global or international funds – may all be load funds. So, again, don’t avoid purchasing shares in a mutual fund simply because it charges a load.
Which Type of Load is Preferable?
While we’re at it, one final question. When you do purchase a mutual fund (or funds) that charge a sales load, what type of load should you choose: a front end load (A share), or back end load (B or C shares)? While it may seem counter-intuitive, in the long run, the upfront load – A share – is the better one, financially. Why? Because the total expense ratio on front end loaded (A share) funds (the load, plus 12b1, management, and other fees charged by the fund) is much less than on back end loaded funds (B and C shares). And this is true with back end loaded funds even if you don’t sell your shares in the fund until after the back end load has disappeared.
‘Isn’t it true that I should only invest in no-load mutual funds?’ The answer is an unequivocal, “No!” Why? Let’s take a look.
Types of Load Funds
First, what exactly is a “load”? Generally, there are two types.
A front-end load (often referred to as an “A” share) is an up-front commission, which covers the cost of paying mutual fund salespeople. It’s a one-time fee – but you will be charged each time you purchase additional shares of the fund. Generally, these fees run between 3 and 5.5%. So, for example, if you invested $2,500 in a fund that carried a 5% up front load, the fee would be $125. If you later invested another $2,500, you’d pay another $125 fee.
A back end load (often referred to as a “B” share) serves the same purpose as a front-end load. But, it’s only charged against money withdrawn before a set period of time. Back end loads generally work on a sliding scale, starting as high as 5.5% on money withdrawn from the fund in the first year, decreasing down to 1% on money withdrawn, usually, in the 5th or 6th year, and (usually) disappearing after that. (Additionally, some funds also sell C shares – a form of “back end” load where you’re charged a sales fee – usually 1% per year – for the entire time you own shares in the fund.)
Choosing Between Load and No-Load Funds
OK, than, since load funds do charge a fee, and, no-load funds don’t), why shouldn’t you avoid load funds and only invest in no-load mutual funds? Well, all things being equal, if you’re choosing between two funds which both perform well and fit well within your portfolio, than you are better off choosing the no-load fund. But, the reality is, things aren’t always equal, so only buying no-load funds is not a good policy. The reason?
Your biggest concern when investing in mutual funds is with a fund’s long-term net return. The problem is, for a large portion of people, choosing only no-load funds while also choosing only the best funds ( i.e. those with the best net returns) available to them often isn’t possible. Why’s that?
First, a large portion of many people’s mutual fund investments are through their company’s retirement plans, and many of these plans only offer funds that charge a sales load. Second, in many cases, the best funds (those with the best net returns) available in a particular arena of investing – for example, global or international funds – may all be load funds. So, again, don’t avoid purchasing shares in a mutual fund simply because it charges a load.
Which Type of Load is Preferable?
While we’re at it, one final question. When you do purchase a mutual fund (or funds) that charge a sales load, what type of load should you choose: a front end load (A share), or back end load (B or C shares)? While it may seem counter-intuitive, in the long run, the upfront load – A share – is the better one, financially. Why? Because the total expense ratio on front end loaded (A share) funds (the load, plus 12b1, management, and other fees charged by the fund) is much less than on back end loaded funds (B and C shares). And this is true with back end loaded funds even if you don’t sell your shares in the fund until after the back end load has disappeared.
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