Archives For January 2007

While doing some research earlier this evening, I came across a pretty good tutorial on the SEC website regarding mutual fund fees and expenses. They do a good job explaining each fee and what is supposed to be for.

Assuming that 2007 turns out to be a good year for the stock market, mutual fund managers will be happy to forget about 2002. What am I talking about? Well, according to this Wall Street Journal article ($), the most often-used gauge of mutual fund performance is the 5-year average. As of right now, the most recent 5-year period includes 2002, which was a bad year for the market. The S&P 500 Index lost over 22% that year. At the end of 2007, mutual fund managers will report their 5-year averages using the 2003 – 2007. It will make a huge difference in their performance numbers. As the graphic below shows, the average annual return of the S&P 500 Index was 6.19% over the last five years.

Now, if we wipe out 2002, the average annual return rises to 14.46%. That’s a HUGE difference!

Granted, the 2007 has just started and there’s no telling where the market will end up at the end of the year. If the market ends up down for the year, the mutual fund companies will have to start all over again!

One important thing that investors should take from this is to ALWAYS look at the long-term. Although five years is a lifetime to a mutual fund manager, five years IS NOT long-term in the eyes of an investor.

Charles Kirk of the Kirk Report has posted a list of stock market lessons he learned from his readers (Part 1, Part 2 and Part 3). I’m not a “trader” but that doesn’t mean that some of this stuff is applicable to me.

Why 12b-1 Fees Are Evil!

January 31, 2007

First off, what’s a 12b-1 fee? According to Investor Words, a 12b-1 fee is:

An extra fee charged by some mutual funds to cover promotion, distributions, marketing expenses, and sometimes commissions to brokers. A genuine no-load fund does not have 12b-1 fees, although some funds calling themselves “no-load” do have 12b-1 fees (as do some load funds). 12b-1 fee information is disclosed in a fund’s prospectus, is included in the stated expense ratio, and is usually less than 1%.

So, 12b-1 fees cover promotion, distribution, marketing expenses, and sometimes commissions to brokers. None of these, aside from broker compensation, add value to the existing shareholders. That’s what is evil about 12b-1 fees.

How much are 12b-1 fees?

A 12b-1 fee is usually 25 basis points (.25%) and is charged annually. Doesn’t sound like much does it? Well, believe me, it adds up! Take a look at the following graphic. The first one is for a one-year time period. The second graphic is for a 10-year time period.

12b-1 Fees

12b-1 Fees

As your account value grows, the 12b-1 fee (which is a percentage of your account value) grows too. Over the long-term it can really add up.

That’s not all, the better rate of return you get, the more you pay in 12b-1 fees as this graphic shows:

12b-1 Fees

To arrive at these numbers, I assumed an investment of $100,000. I then ran the numbers without a 12b-1 fee to get an end result. Then I ran the numbers again minus the 12b-1 fee and subtracted that result from the first result. Make sense? Basically, I used the same method as the first two graphics, but arranged the results differently for easy comparison.

The bottom line

In my opinion, 12b-1 fees do not add value unless they are used to compensate a broker (as long as that broker is earning it). If you are investing on your own through no-load mutual funds, then I would think twice before buying a fund with a 12b-1 fee. Of course the choice is yours. After all, it is your money.

Lately I have noticed that some of the stuff I order online that was normally shipped with UPS is now being shipped via “UPS Mail Innovations.” I don’t see anything “innovative” about this program:

UPS Mail Innovations

So, UPS picks up the package from the merchant and then hands it off to USPS for delivery. Wow! That is innovative.

My complaint: it takes longer to get my orders.

Scott over at MoneyBloggerPodcast has posted his interview with Rachel Kesel, founder of The Compact. What’s “The Compact” you ask? Well, according to their website:

We are a group of individuals committed to a 12-month flight from the consumer grid (calendar year 2007).

The Compact has several aims (more or less prioritized below):

  • To go beyond recycling in trying to counteract the negative global environmental and socioeconomic impacts of disposable consumer culture and to support local businesses, farms, etc. — a step that, we hope, inherits the revolutionary impulse of the Mayflower Compact.
  • To reduce clutter and waste in our homes (as in trash Compact-er).
  • To simplify our lives (as in Calm-pact)

We’ve agreed to follow two principles (see exceptions etc. on our blog).

#1 Don’t buy new products of any kind (from stores, web sites, etc.)
#2 Borrow, barter, or buy used.

I’m not knocking it, but I don’t think this is a group I could ever be a part of. But, to each his/her own. I understand about over-commercialization and I think we do need to take a step back and relax. However, I don’t see how “not buying new products” accomplishes this. Also, borrowing and bartering would not simplify my life.

First off, I want to tell everyone thanks for their comments on my “How Am I Doing?” post. I was surprised by how “nice” the comments were until I went back and reread the part of my post that said, “leave a nice, CONSTRUCTIVE comment…” I didn’t mean that the comments had to be positive. LOL! Anyway, I went in and took out the word “nice” but I think it was too late.

As a thank you I decided to give away a $25 e-gift certificate to The winner of that drawing was commenter #9, Pete of MyFinancialAwareness. Congrats, Pete! Everyone else stay tuned…