What Would You Say You 'Do' Here?

One of my favorite scenes in the movie Office Space is when Tom Smykowski is interviewed by the consultants hired to help Initech downsize. During the interview it becomes painfully obvious that his position isn't necessary. When he's finally asked point blank, “What would you say you do here?”, Tom replies, “…I have people skills! I am good at dealing with people! Can’t you understand that?!?”

As an investor it’s important to look at each of your holdings like a consultant and ask what it’s doing in your portfolio. Each investment should have a clearly identifiable role in the overall risk/return of your portfolio. This post covers some of the asset classes commonly used in portfolios to see what they might do to affect a portfolio's return potential.

The portfolio mixes discussed are for educational purposes only and are not recommendations. The portfolios are divided evenly between the investments used in each example and are rebalanced annually.

US Stocks

I tend to think of large-cap US stocks as the first building block of an investment portfolio, so that’s where I’ll start. An investment in Vanguard 500 Index (VFINX) — a mutual fund designed to track the S&P 500 index, one of the more popular benchmarks for large-cap US stocks — would have earned an annualized return of 7.66% for the 10-year period ending June 30, 2014.

The next asset class we might consider adding to our portfolio is small-cap US stocks. Although they tend to be more volatile, stocks of smaller companies have historically outperformed large-cap stocks.

One of the more cost-effective ways to add small-cap stocks to your portfolio is to use a mutual fund that invests in the entire US stock market like Vanguard Total Stock Market (VTSMX) instead of using a separate small-cap stock fund. The average annual return of Vanguard Total Stock Market was 8.31% for the 10-year period ending June 30, 2014, which is 0.65% more per year than Vanguard 500 Index.

International Stocks

Although they’ve underperformed US stocks recently, as a long-term investor it’s a good idea to consider having international stocks in your portfolio. Not only could you benefit during times when international markets outperform the US market, but you could also benefit from international investments if the dollar declines against other currencies. For this asset class I’ll use DFA Large Cap International (DFALX) which invests in large-cap stocks in developed international countries.

Moving 50% of our portfolio to DFA Large Cap International and keeping the other 50% in Vanguard Total Stock Market for large- and small-cap US stock exposure would have earned 7.80% per year from June 2004 through June 2014. Although this mix produced a lower return than Vanguard Total Stock Market by itself, splitting your portfolio evenly between these two funds did produce better results than only holding an S&P 500 index fund over the same timeframe.

Emerging Market Stocks

Emerging markets like Brazil, India, and China don’t always move in lockstep with developed markets, so adding emerging market stocks could be a great way to diversify your portfolio. For this asset class I'll use DFA Emerging Markets (DFEMX).

A portfolio with one-third in Vanguard Total Stock Market, one-third in DFA Large Cap International, and one-third in DFA Emerging Markets would have averaged 9.45% per year through June 2014. This is 1.14% more per year than Vanguard Total Stock Market and a whopping 1.79% more per year than Vanguard 500 Index!

Real Estate Investment Trusts (REITs)

Many investors consider REITs to be an important addition to a portfolio. The historical return from REITs has been similar to large-cap US stocks, but REITs offer great diversification benefits since they don't move in tandem with the overall stock market.

Moving 25% of your investment assets to Vanguard REIT Index (VGSIX) — while holding 25% in US stocks, international stocks, and emerging market stocks — would have increased our theoretical 10-year average annual return to 9.76%. That’s quite a boost over a portfolio of only large-cap US stocks!

Value Investments

The last thing I’d like to do to our hypothetical portfolio is to add separate holdings for US and international small-cap value stocks. For domestic small-cap value stocks I’ll use DFA US Small Cap Value (DFSVX) and for international small-cap value stocks I'll use DFA International Small Cap Value (DISVX).

Just like small-cap stocks offer a higher return potential than large-cap stocks, value stocks have historically outperformed the market as a whole. But in order to capture the potentially higher returns from small-cap and value stocks, you have to be patient enough to hold them for the long-term. And this can be difficult to do when other segments of the market are outperforming value stocks.

So our final theoretical portfolio is evenly divided between Vanguard Total Stock Market Index, DFA Large Cap International, DFA Emerging Markets, Vanguard REIT Index, DFA US Small Cap Value, and DFA International Small Cap Value. This mix would have generated an average annualized return of 9.91% from June 2004 through June 2014, surpassing all of the other mixes we've discussed.

You can see that each of the mutual funds in this hypothetical portfolio serves a specific purpose. They each each represent a specific asset class — or a segment of the market with higher potential return in the case of DFA US Small Cap Value — and mixing them together is a way to have something that “zigs” when other holdings “zag.”

Don’t make the mistake of thinking that you’re diversified just because you have several different holdings. Take time to review each investment you have and ask, “What would you say you do here?”

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Investments mentioned in this post and throughout this blog are for educational purposes only and are not recommendations. Seek investment advice from your personal financial advisor before making any investments.

Who Moved My Small-Cap Fund?

Actively-managed mutual funds have a lot of flexibility over the types of investments they hold. One problem with this flexibility is that it often leads to style drift, which is a term used to describe a gradual change in investment style within a fund. Style drift is important to understand since a change in the investment style of a single fund could change the expected risk and return of your overall portfolio.

I wasn’t concerned about style drift when I first started investing. I believed that a good active manager could outperform the market by changing investment styles as the market changed. However, after years of trial and error - and stumbling across the efficient-market hypothesis in 2005 - and realized that style matters much more than skill.*

Avoiding style drift is one of the many reasons investors select index funds over actively-managed funds. Since index funds track specific indexes, their holdings and investment strategies are completely transparent. Managers of index funds aren’t able to change the investment style since they are required to replicate the performance of the index they follow.

For example, an index fund that tracks the S&P 500 Growth Index isn’t going to start to invest in emerging market stocks because the manager thinks they look cheap relative to US stocks. Likewise, a mutual fund that tracks the MSCI World ex-USA All Cap Index isn’t going to hold US stocks. With a portfolio of index funds, you’re in control of how much exposure you have in a specific asset class. And not having to worry about style drift in your portfolio helps you keep the hot side hot, and the cool side cool.

Okay. So now that I’ve told you that you don’t have to worry about style drift in your index funds, I’m now going to explain why you have to worry about style drift in your index funds. Confused? I’ll explain.

Let’s consider US small-cap stock indexes to illustrate how an index fund might drift off course. There are several indexes that track US small-cap stocks, and each individual index has a specific set of criteria to determine what constitutes a “small-cap stock.” The stocks of companies that meet the criteria will be added to the index, and the mutual funds that track that index will be required to buy that company’s stock. In the same manner, index funds have to sell stocks that are removed from an index.

Instead of having strict breakpoints to define “small-cap”, many indexes have bands that allow the index to continue to hold a stock after it migrates out of the small-cap portion of the market. This happens when a small company continues to grow and enters the “mid-cap” area of the market. The basic idea behind bands in an index is to reduce turnover and trading costs for the mutual funds that track that index.

Certain indexes from the Center for Research in Security Prices (CRSP) use bands instead of breakpoints. (You can read more about banding and migration at the CRSP website here.) Vanguard recently changed the indexes that many of their funds follow to CRSP indexes, and this index change resulted in a style change for the Vanguard Small-Cap Index mutual fund.

The table to the left shows the percentage of stocks in the Vanguard Small-Cap Index fund that were considered large-cap (L), mid-cap (M), and small-cap (S) as of 2/28/14. At that time, only 54% of the fund’s holdings were classified as small-cap stocks.

Dimensional Fund Advisors (DFA) is another provider of index funds. Unlike Vanguard, DFA offers funds only through approved financial advisors. After years of following their research, I was recently granted access to DFA funds for myself and for clients. We’re now in the process of updating client portfolios to include DFA funds where appropriate.

The table to the right shows the holdings of the DFA US Small-Cap mutual fund as of 2/28/14. The fund held 91% of its assets in small-cap stocks, much more than the Vanguard fund that tracks the same segment of the market.

The average market cap (i.e. company size) of the two funds helps illustrates how different they are. Vanguard Small-Cap had an average market cap of $2.87 billion on 2/28/14. The market cap for the DFA fund at that time was $1.45 billion, or 49.5% smaller than the Vanguard Small-Cap fund.

So when it comes to US small-cap stock funds, my opinion is that DFA US Small-Cap is a much better option than Vanguard Small-Cap. Both are index funds, but the DFA fund keeps a much stronger exposure to small-cap stocks and their potential to outperform larger stocks over time.

*A few years ago I gave some background into my transition away from active management in a post titled “To Index, Or Not To Index: That Is The Question.”

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

The Hidden Costs of Investing - What You Don't Know Can Hurt You!

You might know that nothing in life is free, but do you know the true costs of your investments? Unfortunately, many of the costs associated with mutual funds, annuities, and other financial products are hidden in the fine print...if they're even disclosed at all!

Here are some of the common hidden costs you're likely to find in the financial world.

Mutual Fund Expense Ratios

Expense ratios measure the cost of investing in a fund. They are deducted daily before performance figures are reported and will directly reduce your investment returns. The average mutual fund expense ratio is around 1.4%, meaning that the average fund charges investors 1.4% per year. There are plenty of great mutual funds with very low expense ratios, so don't think that you have to "pay for performance" when investing.

Mutual Fund 12B-1 Fees

12B-1 fees are used to compensate advisors and don’t benefit you directly. They start at 0.25% per year and go up to 1.00% which is the highest allowed by law. When looking for a fund, keep in mind that not all mutual funds charge 12B-1 fees. True no-load mutual funds don’t have a 12B-1 fee higher than 0.25% and many don’t have one at all!

Sales Commissions (Sales Loads)

Most financial advisors receive sales commissions (sales loads) from the products they recommend. (See my post about mutual fund commissions here.) Not only are commissions a potential conflict of interest, but they also make it hard to determine the true cost of advice since most of them aren't disclosed. The only way to be sure to avoid these hidden costs is to work with a fee-only advisor that never receives sales commissions.

Lower Returns

Don't let an advisor try to convince you that you won't pay the sales commission that he or she will receive from a mutual fund, insurance policy, or other product. That money will come from you one way or another! If the commission isn't deducted from your initial investment, then your future returns will likely be lower than they otherwise would be in order to make up for the commission paid your advisor.

Surrender Charges

Products that pay sales commissions to advisors often have a surrender charge that take effect if you sell the product within a certain time frame. I frequently see annuities and life insurance policies with surrender charges that last for 7 to 10 years or more! Although you won't pay surrender charges if you leave your money alone, they do restrict how soon you can move your money without losing a portion of your investment.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

The Nifty, Thrifty Thrift Savings Plan (TSP)

The Thrift Savings Plan - or TSP for short - is a retirement plan designed for members of the uniformed services and Federal civilian employees. If you're eligible for the TSP, don't overlook it just because you have a pension! TSP contributions should be an integral part of your retirement planning.

How Your Money Is Invested

The TSP has five funds that invest in different types of stocks and bonds, as well as several "Lifecycle Funds" that invest in different combinations of the five individual funds based on various investment time horizons. Participants have complete control over the mix of funds they select for their accounts.

Available TSP Funds
C Fund - Large- and Mid-Sized US Stocks
S Fund - Small- and Mid-Sized US Stocks
I Fund - International Stocks
F Fund -  US Government, Corporate, and Mortgage-Backed Bonds
G Fund - US Government Securities
L Funds - Mix of C, S, I, F, and G Funds Based on Various Time Horizons

Contribution Limits and Taxation

Just like 401(k) and 403(b) plans, Servicemembers and Federal employees make contributions to individual TSP accounts. Some Federal employees receive matching contributions in addition to the amount they contribute. You can contribute up to $17,000 to your TSP in 2012, or $22,500 if you’re 50 or older. These amounts are separate from any matching contributions you receive. Servicemembers in combat zones are eligible to contribute up to $50,000.

Currently TSP contributions are tax-deductible when made and withdrawals are taxed in retirement. Beginning sometime in the next few months participants will have the option to make Roth-type TSP contributions that won’t be tax-deductible now but will provide tax-free withdrawals in retirement. Withdrawals of Roth-type TSP contributions can be a great way to balance out taxable pension benefits in retirement.

Fees and Expenses (Or: My Favorite Part of the TSP)
Mutual funds sold by brokers often charge up-front commissions of 5.75% or higher. In addition to sales charges, they often have very high ongoing expenses.  According to Morningstar, the average expense ratio of funds that invest in large US stocks is 1.45%. The expense ratios for small US stock funds and international stock funds are much higher, averaging 1.61% and 1.68% respectively.

There aren't any sales charges or commissions on TSP funds. In addition to avoiding those charges, you'll also pay some of the lowest expense ratios I've ever seen. According to the TSP website, the 2010 expenses of all of the funds were 0.025% or less! These low costs are one of the best reasons to invest in the TSP. The less you pay in investment costs, the more you keep for yourself!

What Happens When You Leave

Any money you contribute to the TSP is yours to keep. When a Servicemember separates from service, or a Federal worker leaves his or her job, they have the option to roll their money to an IRA or leave it in the TSP. There’s also the option of cashing it out, but that can lead to taxes and early withdrawal penalties if you’re under 59 ½.

My suggestion is to consider leaving your funds in the TSP when you separate from service or retire. It has all of the basic asset classes you need to build a diversified portfolio and some of the lowest costs around.

You can go to www.tsp.gov to learn more about the TSP and available investment options

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Five Rules for Investment Success

Rule 1: Lower Your Investment Costs

Rather than wasting time worrying about things beyond your control - like the direction of the stock market, interest rates, or inflation - focus on things you can control in order to improve your odds of investment success. A simple thing to control is the cost of your investments.

You can reduce your investment costs by choosing “no load” mutual funds over funds that pay sales commissions. After all, how does paying a 5.75% upfront commission improve the odds that a fund will make you money? Another easy way to control your costs is to select mutual funds with lower than average expense ratios. (You can read more about mutual fund expenses and fees in a previous post here).

Rule 2: Know What You're Paying for Advice

Another thing you can control in the investment world is how much you're paying for financial advice. Make sure your advisor discloses all sources and amounts of income so you know exactly what you're paying. You might be surprised at how much the "free advice" you receive from your broker is costing you! (FYI - The hidden costs (i.e. sales commissions) of annuities and life insurance can be especially high.)

You can avoid hidden costs by working with a "fee-only" advisor. Unlike advisors that use the term "fee-based", "fee-only" advisors are paid directly by their clients, never receive sales commissions, and have an incentive to recommend low cost investments and insurance. (See if your advisor would be willing to sign a Fiduciary Statement like the one I use here.)

Rule 3: Ignore Your Emotions

All of us are familiar with the saying “buy low, sell high”, but following your emotions when you invest usually leads to doing the opposite. Think twice before going along with the crowd during manias like the dot-com boom and avoid panicking during market declines. Make sure you follow a clearly defined investment strategy so you can take emotions off of the table when making investment decisions.

Rule 4: Don’t Forget About Taxes

Whether or not you realize it, you have an investment partner involved in every decision you make: Uncle Sam. In addition to taxable investment accounts, make sure you're using tax-favored accounts like 401(k)s, 403(b)s, Traditional IRAs, and Roth IRAs whenever possible.

For most investors it makes sense to have a combination of "tax-deferred" accounts (e.g. 401(k), 403(b), Traditional IRA) and "tax-free" investment vehicles (e.g. Roth IRA, Roth 401(k)) in order to balance current and future tax savings. Keep in mind that Uncle Sam won't forget about you later in life!

Rule 5: Understand Risk

All investments involve risk. If you invest in stocks, you face the risk that stock prices could tumble. If you hold more stable investments like bonds and CDs, you face the risk that the return you receive won’t keep up with inflation over time.

That’s why most investors diversify into a mix of different types of investments. Make sure you understand and are comfortable with the risk you’re taking with each individual investment as well as with your portfolio as a whole.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com

The "Single Basket, Multiple Eggs" Quandary

After closing at a record high on October 9, 2007, the Dow Jones Industrial Average proceeded to lose over 53% of its value over the next 16 months. As if adding insult to injury, the ‘07-’09 losses occurred just a few years after the Dow fell close to 38% during the dot-com debacle of ‘00-’02.

It doesn’t matter that the intervening five years were good for stock investors. The combination of these two huge bear markets within the past decade has probably caused many individuals to give up on stocks forever.

Modern Portfolio Theory to the Rescue

Individual investors have been told that market losses like these can and do occur, and the way to prepare for these losses is to diversify your portfolio. While I don’t doubt that smart investors have always avoided “putting all their eggs in one basket” so to speak, most investors - individual and professional alike - currently use Modern Portfolio Theory (MPT) as the basis for their diversification decisions.

The basic idea behind MPT is that investors face two types of risk: the individual risk of each holding (unsystematic risk) and the risk of the entire market (market risk). MPT states that the individual risk of each holding decreases as the number of individual holdings increases.

According to MPT, if you hold a sufficient number of individual investments, unsystematic risk will be diversified away and you’ll only be left with market risk. Harry Markowitz, the father of MPT, argued that the more diversified a portfolio, the lower the risk.

Most advisors - myself included - heed this advice and recommend mutual funds (and ETFs) over individual securities and recommend holding a mix of different asset classes like US stocks, international stocks, bonds, real estate, etc. The idea is is to have one investment that “zigs” when another one “zags” in order to cut down on risk and increase your potential return.

In Summary

Many investors that have given up on stocks after the last two bear markets were either chasing "hot" investments or had too much money in stocks rather than in more secure holdings like bonds. Although it's not foolproof, the MPT theory of investing across multiple asset classes and holding a diversified mix of investments in each asset class can reduce the risk of suffering large investment losses.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Recommended Reading

The Millionaire Next Door by Thomas J. Stanley and William D. Danko

This book profiles US households with net worths of at least $1,000,000. Not only does it dispel the myth that most millionaires inherit their money, but it also details the saving and spending habits that helped these individuals accumulate their wealth. Since this book focuses on their lifestyle choices rather than investments, you don’t have to know anything about investing to benefit from reading it.

Why Smart People Make Big Money Mistakes and How to Correct Them by Gary Belsky and Thomas Gilovich

This book studies why we make the decisions we make when it comes to spending, saving, and investing. The authors believe - and I wholeheartedly agree - that by studying the psychological factors behind your economic decisions you'll be able to change your behavior in ways that will benefit you financially.

Investing in an Uncertain Economy for Dummies® by Sheryl Garret and Members of the Garrett Planning Network

This book contains over 80 investing and financial planning "tips" from independent, fee-only advisors. The fact that it touches on so many topics - rather than focusing on a single area like "mutual funds" or "insurance" - makes it a great resource for new investors or a reference for experienced investors. Full disclosure: although I’m a contributor to this book, I don’t receive any compensation when someone purchases a copy.

Common Sense on Mutual Funds by John C. Bogle

Most investors are better off investing in mutual funds rather than selecting individual stocks and bonds. Unfortunately, even if you narrow down your investment choices to “mutual funds”, you're still left with thousands of alternatives. This book will help you sort through the noise and get a better understanding of the world of mutual funds.

Deal with Your Debt: The Right Way to Manage Your Bills and Pay Off What You Owe by Liz Pulliam Weston

Most books on debt focus on how to eliminate it completely and encourage readers to avoid debt at all costs. But since most people find completely avoiding debt unrealistic, this book helps readers understand how to manage it effectively. It covers strategies for dealing with every form of debt including credit cards, student loans, auto loans, and mortgages.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com

Year-End Tax Tips

Tip 1: Be careful when buying a new mutual fund.

Most mutual funds pay out capital gains and dividends toward the end of the year, so check for potential distributions before you purchase a new fund. And think twice before purchasing a fund that will be distributing a large amount of gains and dividends.

The IRS doesn't care how long you’ve held a mutual fund when it comes to taxes on distributions. Investors that purchase a fund just before the payout will be taxed the same as the investors that have held the fund throughout the year.

Tip 2: Prepay your property taxes.

Property tax payments aren’t due until the end of January, but if you pay them before the end of the year you can claim the deduction in 2009. But if you expect to be in a higher tax bracket next year, you can wait until January to pay then prepay next December so you can deduct two years of property taxes in 2010.

Tip 3: Pay your January mortgage payment before December 31st.

By paying your January mortgage payment before the end of the year, you’ll be able to increase your mortgage interest deduction this year by the extra amount of interest you pay in the January payment.

Tip 4: Review your portfolio.

Investment gains can be reduced by investment losses, and excess losses can be written off against income up to $3,000 and rolled over to future years. But before you start selling investments, remember that the long-term capital gains tax rate for individuals in the 10 and 15% tax brackets is 0%, and this is scheduled to continue through 2010.

Tip 5: Defer income.

If you’re self-employed and use the cash method of accounting, you might be able to benefit from waiting until the end of the year to invoice customers so you don’t receive the income until January. This is especially beneficial if you expect to be in a lower tax bracket next year.

Tip 6: Contribute to your 401(k) or 403(b)

Contributions to 401(k)s and 403(b)s will reduce your taxable income for the year. In addition to saving money on taxes, you'll also receive "free money" from your company if they match your contribution.

Keep in mind that some 401(k) plans now offer employees the option of making "Roth type" contributions that don't reduce your current taxes but will be tax-free when withdrawn if you meet the requirements.

Tip 7: Contribute to a Traditional IRA

Contributions to a Traditional IRA will reduce your taxable income for the year just like contributions to 401(k) and 403(b) plans. Just make sure you are eligible to deduct the amount you contribute. (Click here to check the deduction limits for 2009.)

Tip 8: Don't contribute to your 401(k), 403(b), or Traditional IRA

Yes, this tip contradicts tips 7 and 8. The point of this tip is that you need to balance current tax savings with future tax savings. It might be better for you to avoid taking a tax deduction now in favor of contributing to a Roth IRA, or making "Roth type" contributions to your 401(k), in order to have a source of tax-free income in retirement.

Deciding whether to take the tax deduction now or later involves some calculations, knowledge of current tax law, forecasts about future tax law, and a little bit of "gut feeling"; so consult your tax advisor or a "fee-only" financial advisor if you want professional guidance.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

This and all other posts on this blog are for informational purposes only. This is not to be considered tax advice and is not intended to be used, and cannot be used, for the purpose of (1) avoiding tax penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Mutual Fund Costs and Share Classes

Most of us are hard-wired to perceive high-cost items as being more valuable than lower-cost alternatives. While that might be true in some areas of life, when it comes to investing in mutual funds, selecting funds with low expenses is a great way to increase your chance of investing success.

Numerous studies have shown that mutual funds with low expenses tend to outperform funds with high expenses over time.

The world of mutual fund investing can be broken down into two groups: no-load (no commission) funds and loaded (commission) funds. No-load funds charge an expense ratio that includes a management fee and 12b-1 fee, although many no-load funds don’t charge 12b-1 fees. Loaded funds - classified as either A, B, or C shares - charge expense ratios and pay various types of commissions to the advisors that sell them.

Expense Ratio: Includes the management fee and any 12b-1 fee that is charged. All mutual funds will have an expense ratio.

Management Fee: Pays the fund manager and covers record keeping, accounting, auditing, and other expenses. All mutual funds will have a management fee.

12b-1 Fee: A sales charge that is paid to the selling agent to cover marketing of the fund. By law, no-load funds can’t charge a 12b-1 fee over 0.25%, but loaded funds can accept 12b-1 fees.) All loaded funds will have 12b-1 fees, but many no-load funds will not have 12b-1 fees

Loaded mutual funds (funds that charge commissions) will be classified as A, B or C shares.

Class A Shares: Charge an up front commission, deducted from your initial investment, that usually starts around 5.75%. Discounts, or “breakpoints”, are available under certain circumstances. A shares can be “load waived” as well, meaning the front end load is waived, but 12b-1 fees still apply.

Class B Shares: Charge a back-end commission starting around 5% that declines over 5 to 10 years until eliminated. B shares charge a high 12b-1 fee to compensate for the commission paid to the selling agent.

Class C Shares: Usually charge a 1% back-end load if sold within the first year. C shares charge a 12b-1 fee of 1.00% that goes to the selling agent. Don’t let an advisor tell you that a Class C share is a “no-load fund”! It isn’t!

Now that you know the various fees charged by mutual funds, you can look at your portfolio and figure out what you’ve been paying.

My advice is to avoid loaded mutual funds in favor of no-load funds with low expense ratios and no 12b-1 fees. Those are the types of funds I purchase for myself and recommend to my clients.


To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.