Go Ahead and Buy High Load Mutual Funds…

…if you want to ensure that you underperform the market for the rest of your life. Ok, I am being a bit dramatic here but a recent article by George Mannes at Money.com really had me intrigued. It was based on a question from a reader that went like this:

I have invested in no-load mutual funds for 20 years, but I’m looking at a fund with a 4.5% load. If I plan to hold it for a very long time, investing periodically, does it make sense to pay the load?

I really liked this question for two reasons. First, it exposes people to what a “load” mutual fund is. Second, it provides the perfect venue for an informed investor to slam “load” funds and explain that they are never a good idea to invest in, no matter what. I was looking for some real insight and a good bashing of “load” funds from George, and he kind of pulled through, but not to the extent I was looking for. He actually said that this 4.5% load fund was not a bad choice, but there were better. Here is the part of his response I did like:

On the practical front, remember why funds charge sales loads: to compensate your broker for the wise advice he or she has given by steering you to the fund. But you seem well versed in fund investing and picked this one out yourself; why pay for services not rendered?

Now the math: By paying the load, you’re immediately putting yourself $4.50 in the hole for every $100 you spend. That’s $4.50 extra you have to make to match a similar no-load fund’s performance. It’s as if you gave someone a 4½-minute head start in a footrace: Yes, the longer you run, the better your chance of catching up, but why make it hard on yourself?

And history teaches us you’re not paying more for quality. “There’s no evidence that the performance of load funds vs. no-load funds will make up for the commission you pay on the former,” says Mercer Bullard, a securities law professor at Ole Miss.

Good point – for every $100 you spend the first $4.50 goes into your brokers hands and not to work for you in your investments. The second good point is that there is no evidence that load funds do better than no-load funds. So why pay it given the huge number of investment choices available.

My main issue with George’s answer is what was not said. He could have greatly expanded what losing that $4.50 off of every $100 really means in real dollars. I ran some compounding formulas in my spreadsheet program and found that the $450 that Tom pays in a load would mean he would give up $2,097 in portfolio value with all things being equal. That is a large sum of money on a $10,000 investment.

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I think George could have been more direct – never buy loaded mutual funds, no matter what. There never is a good reason. Consider index funds and dividend stocks instead!