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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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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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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I’m a big believer that the benefits of saving and investing is allowing money to provide financial freedom and while this type of extreme savings and minimalist living isn’t for everyone, it is an interesting new concept that more and more people are embracing. We can all learn a few things from these ideas.

Click Here to See the Full Article on CNBC.com

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