A 46-year-old self-employed reader whose business is doing well and whose wife is employed as a legal secretary writes that he wants to invest $40,000 in a mutual fund to get a higher return than the interest he earns on the money in his bank's money market fund.
"I am ready to invest this savings a little further out," he says, "as I don't see the need for it for the immediate future."
Before making his move, he has a few questions:
* "Do you agree [with those who oppose] paying heavy up-front or [back-end] loads? Almost everyone trying to get me to invest my money has heavy management fees and says I will pay one way or the other."
More important than whether you pay a load is how much you can earn by investing in a fund.
A sales load cuts into your return -- severely if you hold a fund briefly, less if you hold it a few years. You can see this when you compare the total returns of load funds for various periods before and after adjustment for the sales charges.
All other costs being equal, if a load fund and a no-load fund own identical portfolios and pursue identical policies, the load fund will produce a lower return for shareholders.
Of course, all other costs -- mainly annual operating expenses -- are not always equal. Expressed as a percentage of a fund's average net assets, they can be high for load or no-load funds. They include investment advisory fees (out of which portfolio managers are paid) and are unrelated to loads, which are paid to brokers and others in the distribution chain. The exception: Rule 12b-1 distribution expenses of as much as 1 percent or more annually, which back-end load funds commonly impose and pay to brokers too.
When studying funds, you'll soon realize it's not necessary to absorb high annual fees. Good equity funds are available with total expenses no higher than 1 percent or so of average net assets; good bond funds with expenses no higher than 0.5 percent to 0.75 percent.
* "I am leaning toward a bond fund that can easily be transferred into a stock fund when I feel more comfortable about the stock market. I realize the stock market outperforms all other investments over a long period, but why should I enter it while it's not performing? I feel very conservative, as these are my only savings."
If you could know exactly when the bull market is likely to pick up and sustain its momentum, this might be a worthwhile strategy. But you can't, and neither can anybody else.
Equity fund and other money managers who remain fully invested in stocks, despite the market's fluctuations, do so in part because they feel they cannot afford to be caught on the sidelines -- in cash -- when the market takes off. Investors don't pay them to be in no-risk Treasury bills, managers say.
If you want to be invested in a stock fund, plan to be in it for several years and can accept the volatility that is inherent in one, it would seem to make sense to get started. But invest a fixed amount at regular intervals. By practicing what is called dollar cost averaging, you wouldn't risk all of your money at once; when stocks fall, you pick up more shares at lower prices.
If you are seriously concerned about your portfolio's risk level, you might consider splitting it between stock and bond funds, say 65-35. The bond fund could be one of intermediate maturity (five to 10 years). Choose between taxable and tax-exempt funds on the basis of your tax bracket and the yield spread between the two types.