Breaking down your investment options

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I just finished writing a plethora of posts about the different kinds of mutual funds. I also managed to sprinkle in quite a few informative tidbits about ETF’s, as well.

After re-reading a few of them, I realized there’s a lot of information to digest.

I don’t regret writing as much as I did, but I can see how the casual reader might get lost in it all. So I’ve decided to condense the most important points about the different investment options into one post.

Here’s what you can expect to receive from each:

No load mutual funds

• with no loads you’re buying mutual funds directly from the mutual fund company.
• there is no (out of pocket) charge to buy or sell a no load fund
• you are responsible for choosing the funds yourself
• there is no financial planning or investment guidance included
• fund capital gains are passed on to fund investors

With mutual funds, when the discussion turns to cost, no load mutual funds rule the roost. But at the end of the day, they are mutual funds and have all the same internal expenses that loaded funds have, minus the distribution (12b-1) costs.

I believe no loads are an excellent investment alternative for the high end, self taught investor. If you know your stuff, stay current on the markets and have a healthy tolerance for risk, then a no load investment portfolio is an excellent alternative.

Load mutual funds

• you’re buying mutual funds through a broker or financial advisor
• there may be an upfront charge when you buy or a deferred penalty when you sell
• fund capital gains are passed on to fund investors
• it’s likely, you are working with the financial advisor that recommended the purchase or sale
• there’s anywhere from a modicum of financial planning involved, to a full on financial planning relationship, depending on your advisor.

Loaded funds are definitely more expensive than No Loads, but it may be worth it. By paying more to get into the funds, you should be getting the advice of a financial planner in return. A good financial planner, much like a good doctor or lawyer, can bring a lot to the table.

I believe ‘advisor recommended’ load funds may make sense for investors that may not have the time, expertise or risk profile to manage their own investments. If you decide to go with advisor recommended funds and the help of a professional financial planner, then in my opinion, Class C shares make the most sense.

Please remember a lot of what I’ve written here is predicated on the fact that you’re getting good advice in exchange for the load you paid. This is very often not the case.

ETF’s (Exchange traded funds)

• ETF’s, generally speaking, are the most cost effective way to build a diversified investment portfolio; more so, than No load mutual funds
• ETF’s can be purchased through an advisor managed account or on your own
• I generally charge 1% in a fee based account to build a client’s ETF based portfolios; please note - a client can always buy ETF’s on their own or through a discount broker
• if you own ETF’s in a fee based account, it’s likely the investment allocation was designed after completing a formal financial plan.

ETF’s give investors instant diversification for a fraction of the cost of mutual funds or separately managed accounts. For the high end investor (described above under no loads) I believe ETF’s may be a better fit than No Load funds, unless you have a reason to believe a no load fund is going to outperform the market.

Chance favors the prepared mind

For the average investor, that neither has the time, interest or expertise, ETF’s wrapped in a financial plan is a great way to go.

From a pure cost standpoint, because of the cost efficiencies of ETF’s, today you can get a diversified investment portfolio, a comprehensive financial plan and a Certified Financial Planner all for a great price.

In conclusion

If you don’t feel comfortable with any single investment channel, you can always build a hybrid model, mixing and matching the different resources that make the most sense for you…

Tags: ETF, fee based, investment options, Loads, Mutual Funds, No Loads