What Should I Know When Buying Mutual Funds?

starting this hour while california chat is calling hi chad how are you doing ok How is Dave doing better than I deserve, sir? How can I help it? He had a question about a

mutual

fund. I'm starting to do the investment part and I went. to a broker and I'm finding some good

mutual

funds

with the good percentages as you say with the initial load B of about 5% 5 and 35 and 3/4 is

what

most of them are yes yes yes I was wondering if that's 5

what

ever you said five and three quarters percent is

when

you take you say 12% return would mean I actually only get 7% which isn't five and three quarters a year it's five and three quarters the first time you put money is ok look i don't

know

everything yet and i thought ok let's break it down.

Basically, there are three ways you can go about this. that have commission and no fee mutual

funds

that have no fee there are two types of ways to get to the loaded funds let's talk for a minute we'll use this as a teaching opportunity for all of our listeners okay okay yeah yeah he just walks through me with this and is getting questions. interrupt me while i go ok to start with a no load fund its not sold through a broker you buy them directly from a company and you will see their ads in magazines and websites and things are companies like vanguard and fidelity its ok and that they are mostly no charge which means they don't charge a commission now no Commission does not always mean cheaper for two reasons one is there are two or three ways they charge fees in mutual funds all mutual funds have an annual maintenance fee ok ok Well based on your balance at the time, let's say you had $100,000 in there and the maintenance fee was three-fourths of a percent, that would be seven hundred and fifty dollars that you were charged as a maintenance fee in the mutual fund, okay?

Now, a no-load mutual fund has a maintenance fee, so you'll still have a fee, you just don't have a commission, you don't have the five and three quarters or the other types of commissions that we're going to talk about. in a few minutes so you have a fee now let's say let's go back to our five and three quarters example okay let's say you invested $100,000 in that fund with that broker and you paid the five and three quarters commission and then you That would be five thousand seven hundred and fifty dollars, right, yeah, he paid upfront now, so his maintenance fee on that fund, let's say it was a quarter of one percent, just 250 a year, so for ten years it would be twenty five hundred dollars after ten years. you would have paid in maintenance fees two hundred and fifty a year multiplied by ten, do you understand?

Yeah, okay, and then you would have paid the fifty seven hundred on top of that, so we're talking seven thousand dollars and some change on ten. thousand dollars you're following me if ove r ten now you

know

the other one suppose i had a i looked at one the other day it was no load i didn't buy it because it was a scam i thought but it had a maintenance fee over one percent , I had a maintenance fee of one point two percent, okay, so twelve hundred dollars a year, yes, for ten years on one hundred thousand, that's twelve thousand dollars.

Wow, ok, paid the commission on the other one but it was cheaper. mind i thought oh if i can get around the broker i will make a lot more money but no but not if you get one with a high maintenance fee yeah so you have. I don't get it on the front now there are good no load funds out there that have reasonable maintenance fees and sometimes I buy a no load fund that's ok I'm not against them just warning you no fee doesn't always mean cheaper you have to dig a little deeper to figure that out okay yeah that's the first one So the second thing is with the Commission there are basically two ways that people are getting paid now one is they are doing the five and three quarters up front like you are talking about what are stocks ok and the second way is you are doing what is called C shares and the brokers will manage your entire portfolio for you instead of charging you a commission up front , they'll do it for 1% a year, okay, hey, that's not a bad deal because you have a broker there to advise you. and teach you and help you every year if you have a good broker that is involved and you can call him you know you see bad news about something and you are worried that the stock market will drop 400 points last week in one day and you want to call your broker you have someone to talk to and there's actually a research ad showing that if you have a good broker on your side you tend to make more because you tend to not be as emotional about the decision ok that makes sense right? there i guess it is worth it yes it is worth having a coach there is research that indicates in fact a lot so you could do the 1% deal where they only charge you 1% a year and there is no commission, but they charge you a 1% fee to manage everything, but they're there for you if you need them, you know, and if you want to put in more money, there's no fee, except next year you'll get a bill for 1% of that money that you put on top of everything else you put but then again some people love that and act like that people who charge 5 and 3 some of these people have a holier thing than you in the financial world and act like the people who charge at five and three quarters are scamming someone but let's do the math again because these are the exact same two mutual funds just two different ways to charge it at a 1% fee to manage it or 5 and 3/4 more up front , so let's take our hundred thousand again five and three quarters is five thousand seven hundred and fifty dollars okay one percent out of a hundred thousand if it doesn't grow at all which would be very bad but if it doesn't grow at all one percent $1,000 a year for ten years is ten thousand dollars so even if you do the 1% with no commission trading you pay more well so its better to do the 8th year yes as long as you leave it alone but if you want to buy and sell the funds within there and want to move some stuff later you know you're going to pay that stinking 500 every time you move it so really all three work and I'm fine if you do any three as long as you think through them carefully for your situation. and you decide i used to be a big proponent of only five and three quarters up front because of what we just did but one percent is fine and no load is fine but you ain't holy if you know any of these, the guys in the financial world of the Pharisees and they say, oh I'm a 1% guy and so these other guys are scamming people out of commission up front and then people who don't want anyone to be charged commission or saying that anyone charging a commissioner to rip people off is just not mathematically true, you know, okay, so yeah, I read that online. yes, there is a budget and I read one in Forbes today.

The dude is like someone collects a fee. He's a con artist and there's a used car salesman. You know, I think paying a real estate agent a good commission could usually sell the house faster and for more money, so sometimes the commission is worth it, you just have to get someone who knows what they're doing and that you understand what it does. you're getting in so Amen good question thanks for joining us and let me use you to teach this is the Dave Ramsey show. Watch these other great clips from the show you can do this you know it really is a message whether you have two hundred and seventy thousand dollar student loan debt or 27 thousand well you have fifty thousand dollar income or $500,000 in common