Last year the oldest members of the Baby Boom generation turned
65 years old and millions of them are investing in mutual funds
that are stealing their income.
It matters because many Baby Boomers have shifted their investment
goals from growth to income and as a result, they're relying on the
cash flow generated from their investments to sustain their
lifestyle. How much of their income are mutual funds devouring?
Fund Expenses 101
First things first: There is no such thing as a "free" mutual fund
or "free" investment. In my previous days working as a financial
advisor, I had a prospective client tell me his mutual fund
portfolio wasn't costing him anything. I showedhim the fees in his
fund prospectus. He was surprised.
Broadly speaking, mutual funds fall into one of two categories;
"no load" or "load."
No load funds, as the name implies do not incur a sales charge,
but if you purchase the fund through a fund marketplace, brokerage
firms will typically charge you a transaction fee to buy or sell
the fund.
In contrast, load funds charge upfront or backend commissions,
which are paid to a fund salesperson.
Once you've purchased a mutual fund, the ongoing fees you pay are
called the "expense ratio." This ratio or cost is the percentage of
a portfolio's average net assets used to pay its expenses. Among
the costs included in a fund's expense ratio are management fees,
administrative fees, and 12b-1 marketing fees. Even though these
fees aren't necessarily billed via a monthly invoice, they are a
significant ongoing cost that directly reduces investor returns and
income.
How Much am I Losing?
The conventional step for comparing mutual fund expenses is to use
peer group comparisons by analyzing funds in the same category.
For instance, the fund expenses of a large cap (NYSEArca:SCHB)
or emerging markets fund (NYSEArca:VWO) is compared to its peers in
that same category. And if the annual fees or expense ratio for a
particular fund is more than its peers, then it's overcharging and
if it's less than it's not. While peer group comparisons are OK for
analyzing mutual fund expenses, they only tell part of the
story.
Along with traditional measures, ETFguide uses an alternative
benchmark for mutual fund costs that gets straight to the bottom
line. We look at the percentage of income that fund expenses are
consuming from shareholders based upon the fund's 12-month yield.
By this standard, many mutual funds badly fail.
In FIGURE 1, we evaluated the expense ratios and yields of
popular income mutual funds to find out how much income was being
consumed by the fund's annual expenses. We looked at the Fidelity
New Markets Income (Nasdaq: FNMIX), Fidelity High Income (Nasdaq:
SPHIX), Franklin Utilities (Nasdaq: FRAUX), Loomis Sayles (Nasdaq:
LSBRX), and T.Rowe Price Equity Income (Nasdaq: PRFDX).
We discovered that fund expenses among with these popular income
mutual funds were sucking away a startling 12% to 35% of investor's
income. Unlike taxes, this particular tax - a mutual fund income
tax - can be avoided. How?
The Secret to Getting More Income
Step 1 is to start looking at your fund investments in terms of how
much of your income they are eating up and Step 2 is to eliminate
them. Step 3 is to user lower cost alternatives, for
example, index
ETFs
.
Step 4 is to understand that traditional income sources
like dividend stocks (NYSEArca:DVY) and long-term bonds
(NYSEArca:TLT) are under assault. The combination of low interest
rates and higher looming taxes on dividend income means that income
investors are not generating the kind of income they once did.
The
ETF Income Mix Portfolio
we've assembled has been helping our readers to combat today's
anti-income/anti-investor climate. Since early 2012, our monthly
income trades have averaged $1,040 per month* in cash flow in
addition to traditional income sources coming from dividends.
(*Based on a hypothetical $100,000 all ETF portfolio) The annual
expense ratio for this portfolio is just 0.18%.
Neither the mutual fund industry nor the spendthrift
government or the Federal Reserve are your friends. The
confiscation of your money is their goal.
Fund companies are built for maximum profits for
themselves. The government wants to increase taxes on your
qualified dividends from 15% to 39.6%. And BernanQE & Co. is
destroying income investors with low rates. Fighting back
with a proven strategy is the only way to win.
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