Why You’re Losing Money Buying a Mutual Fund With A Sales Load

You’re feeling good after your last meeting with your financial advisor because they showed you some impressive performance numbers from a mutual fund investment. You think you’re a hero because you’re taking charge of your financial life and being responsible by saving some scratch each month. What if you learned after fees and inflation it was almost impossible to make money purchasing the recommended fund? Not feeling so good anymore, are you?

 You trust your financial advisor and follow their advice. It’s easy! Contributions come right out of your bank account each month. The problem is many mutual funds charge a fee called a sales load and financial advisors LOVE THEM! There are different types of sales loads that can be charged at different times but for the purpose of this post let’s focus on an “A” share mutual fund.

An A share load is charged when you first purchase the fund. Many mutual funds that invest in stocks charge a 5% sales load. What this means is when you invested that $100 last month, only $95 was invested in the fund. Wait, WHAT??? Yup, that extra cost was paid directly to the financial advisor as a commission (with maybe a little bit going to the mutual fund company along the way). Dang, that doesn’t sound good…

So now you know that out of the $1,200 you thought you invested last year, only $1,140 was applied to the mutual fund. Grrrrrr… Then you remembered that the cost of filling up your SUV, buying vegetables because you want to eat healthier, and that Apple gadget you want so bad cost more this year than they did last year. Inflation! The US Consumer Price Index (CPI), which measures the cost of a “basket of goods”, has averaged 2.38% from the beginning of 2004 through the end of 2013 (10 years). Going with the averages, after sales loads and inflation, you’re down -7.38%. Double dang… Really not good.

The icing on this awful tasting cake is when you look at the historical returns of the US stock market. Over the same 10 year period from above, the S&P 500 index rose at an annualized clip of 6.87%. If we assume your mutual fund can’t beat that long term S&P 500 benchmark, and most funds can’t, you lost -0.51% on every dollar you threw into your investment account. That’s some pretty BAD financial advice, and the reasons why you’re losing money buying a mutual fund with a sales load.

There are other ways ways a financial advisor could be compensated for their investment advice, and I touch on this topic in THIS blog post. If you’d like to engage me in further conversation (read: constructive) , feel free to leave a comment by clicking the “Read More” button below or by contacting me HERE.

Thank You!

Greg Lessard, CRPC^®