There is no evidence that front-end load funds perform better than lower fee funds. In fact, logic would tell you that smaller, less successful funds employ front-end loads because they have been unsuccessful attracting assets in other ways, implying their performance could be worse. Additionally, when you see your personalized performance it won’t be based off your $10k investment, it will be based off the amount you invested AFTER paying the sales commission. Performance numbers are always inflated because they don’t account for that fact you started down 5.75% from day 1 due to the front-end load. If you invest the same $10k, your statement will show $9,425 as your cost basis. Meaning, if the value rises to $9,700, your advisor will tell you are up 3%, when in reality, you are still $300 in the whole from the $10k you invested.

If you’ve made the choice to use mutual funds in your investment strategy, make sure your advisor knows that you do not want any front-end load funds. In fact, if your advisor is recommending front-end load funds, I think it’s time to find a new advisor. Many advisors have developed very effective methods to slip a few front-end funds into your account, convincing you of the relative value of said fund. In reality, there is no reason for an advisor to recommend a front-end fund other than wanting to earn the sales commission.

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Now, however, there is another way your advisor is getting paid by mutual fund companies. More reports are coming out about large mutual fund companies paying advisors commissions for putting client money into their funds. According to this report, one-third of Edward Jones’ earnings were generated from these commissions. According to this article, many advisors who advertise themselves as ‘objective’ are actually receiving payments from mutual fund companies to use their specific funds. This is NOT is your best interest. Make sure you understand who your advisor is really working for. Many advisors simply have a suitability standard when showing you an investment. Registered Investment Advisors (RIAs), which represent only ~7% of total advisors, have a fiduciary responsibility to clients, meaning they are legally required to put YOUR interests ahead of their own. This is important to remember as you consider your financial advisor options.

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The purpose of tax-advantage retirement accounts (401k, IRA, etc) is to encourage individuals to put away money for their future. We already have significant restrictions on contributions, income limits, withdrawals, etc, so to me this seems like a logical next step, although this specific proposal seems more about politics than actual revenue, since the President estimates it will raise only $9 billion over a 10-year period, hardly a significant number.

However, this is significant for average Americans even if you don’t believe you will ever hit $3 million in retirement savings. Many small business owners operate SEP-IRA programs for themselves and employees. The rules basically say, the business owner can contribute up to ~$50k a year into the account if the employees receive a 20% of salary contribution from the company. In these situations, if a business owner approaches the $3 million level in his/her own account, there is no incentive, in fact there might be a penalty for continuing the program. This ultimately hurts regular savers, even though the intent it limit upper-income earners from shielding too many assets from immediate taxation.

Read the full article here.

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Building a cash savings and making sure you get any company match in a 401-k is important, but today I want to write about the value of saving in taxable investment accounts. I think there are two key benefits to after-tax investments.

1. Liquidity – In a taxable brokerage account, you have access to the funds any time you need them. If you want to buy a house, need to pay a medical bill or simply like knowing you have access to funds if a need arises, money in a taxable account can provide flexibility and peace of mind. 401k and Traditional IRAs have tax consequences and steep penalties for withdrawals before you turn 59 ½. Some will argue that not having access to the funds will keep you from using the money frivolously before you need it. That is something to consider, but there is something to be said for access to cash and personal discipline.
2. No Future Tax Liability – Since you pay taxes on the money put into a taxable investment account and pay capital gains/dividend taxes annually, the money in a taxable account is 100% yours. You can withdraw money whenever you need, as much as you need and not generate taxable income. With a 401k or a Traditional IRA, every withdrawal creates taxable income, taxed at your marginal rate. That could be 25% or higher. For example, if you have $200k in a 401k plan, at a 25% marginal tax rate, you have a $50k future tax liability, so you really only have $150k.

I’m not suggesting people shouldn’t take advantage of the benefits of tax-deferred accounts. And if you are eligible for a Roth IRA, that is a great savings vehicle as well because you get the benefits of tax-deferred growth, don’t pay taxes on withdrawals and can always withdraw your contributions without penalty. However, there are income restrictions and you can only put $5k a year into a Roth. I’m suggesting after-tax investments should be part of your retirement savings plan.

The conventional wisdom says to maximize savings in tax-deferred investment accounts. I think there is a lot of value in that advice, but I also think the companies that provide 401k plans and IRAs benefit tremendously if you don’t have access to your funds. They are essentially guaranteed years of fee-income once you make a deposit, so their recommendation to focus your savings plan in those types of accounts might not always be in your best interest. You have to find the right balance for you personally, but hopefully I’ve helped you think about some of the benefits of after-tax investment savings.

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I probably go a little overboard in that I track my net worth on a weekly basis. I have stock prices automatically downloaded in a spreadsheet (Will talk about how to do this is a future column), update my savings accounts, mortgage balance, and any contributions or dividend reinvestments that occurred in my investment accounts over the prior week. I also graph all the data, so I can look at one graph and see my net worth and my investment portfolio balances over the past 3+ years. I started doing this at the end of 2009 and it’s amazing to see how we’ve performed in that time period. Amazing in the sense that investments have gone up, but also just in the sense that I can look at over three years of financial history in one place.

For a more normal person, I think updating your net worth on a monthly or even quarterly basis makes plenty of sense. This requires only an hour or so every time you update, so the time commitment is minimal. I break my calculation down into several parts. First, I have my checking and savings accounts, then I track retirement investments, non-retirement investments (Read here for more on non-retirement investments) and estimated housing value less current mortgage amount. I don’t have any other debt other than the mortgage, but if you have student debt, credit card debt, auto loans, etc, you want to keep track of those as well.

To calculate your net worth you want to add up all your assets (house, checking/savings accounts, retirement accounts, other investments, other real estate, etc) and then subtract your liabilities (mortgage balance and any other kind of debt). It’s that simple. Here’s an example:

I left out the value of various household items such as furniture, appliances, etc., but those items do have value and could be included in this analysis if you want to. In fact, while I included a vehicle in my example, I actually don’t include my own vehicle in my calculations. I don’t have a car loan and I know the car is a depreciating asset that I would have to replace if I sold it, so I take a more conservative approach and don’t count it as an asset. However, since my example has a car loan, I thought it was fair to include the value of the car attached to the loan.

Tracking and understanding your net worth can be a very valuable and powerful tool in shaping and helping you achieve your financial goals. I built my own spreadsheet to track my net worth, but I have spent some time on a site called Net Worth IQ that seems like an interesting option. I don’t use it and can’t speak to its security, but at a minimum, it’s interesting to see and read about how people think about tracking their net worth. Happy tracking.

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1. Reaching for Yield – In today’s low interest rate environment, trying to get a higher yield through riskier bonds can carry significant risks. It’s also important to remember that low rates are creating a spike in the scam and ponzi market, so be wary of anyone promising you returns that seem too-good-to-be true.

2. Borrowing significant money for college debt – There are many ways kids can finance college, including working, going to a less expensive university, starting at a community college, etc. Don’t put your own financial future at risk to fund an lavish private university for your child.

3. Owning stock in your employer – I agree that you want to limit your exposure to the stock of the company you work for. You are already highly exposed to that company’s performance by virtue of receiving a paycheck from them. That said, if your company offers an attractive stock purchase plan, or you just really believe in the company, I think it’s prudent to limit your holdings to 10% of your total investment portfolio.

4. Taking Social Security too Early – Especially in today’s low interest rate world, delaying SS can be a great investment if you can afford it. SS payments increase 0.67% per month (8%/year) for every month you delay starting payments. 8% a year looks like a pretty attractive return in this market.

5. Buying Long-Term Bonds – with rates at historically low levels, locking in these yields for 10-30 years seems like a bad idea.

Here’s the link to the full article. 

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