AboutWarren Boroson Expertise Author of "Keys to Investing in Mutual Funds" (Barrons) and "Ultimate Mutual Fund Guide" (Probus). Columnist for Gannett News Service.
Experience Author of 20 books; winner of 1996 Personal Finance award from Investment Company Institute and Washington University. Formerly on staffs of Money and Sylvia Porter's Magazine. Had a radio program (on WEVD)about mutual funds and a newsletter, FundDigest.
Question For years I’ve had American Funds (all A-shares) in my retirement account. In the past I had 401(K) plan that waived the front load, so I was a happy camper. Several years ago I changed a job and now I rolled-over everything into a SEP-IRA and kept AFs in it. Every year I get a 15% annual salary contribution from my employer, which amounts to around $14-$15K and (hopefully) will keep getting higher. My front load now is about 3.5%, so every year I lose about $500 on sales fees.
My portfolio seems to be doing fine and my financial adviser tries talking me into believing that over years these front loads smooth-out and do not mean much. But when I looked at AF web site, the average annual return, adjusted to reflect sales charges, is significantly lower, especially over shorter periods (3-5 years). I realize that each sales charge paid now, maybe 15 years prior to retirement, tends to have a little effect then. But it will keep happening every year. Say, a year or two prior to retirement I kept investing in AF and paying sales charges. Now, I will have much shorter horizon for this fresh front load to “disappear” into allegedly high funds performance.
So, I am looking into switching to no-load funds, possibly leaving the existing AF portfolio alone since the front load “damage” has been already done. I am considering Fidelity and have already opened a brokerage account with them to test the water. Their online tool gave me two retirement portfolio mixes based on my age (52), retirement age (66), income and other criteria: one was Fidelity-only funds, the other all available no-loads. Then I did my own research and came up with my own portfolio, which seems to outperform the others based on historical (what else?) results. I listed them all below:
American Funds (existing portfolio):
ABALX 33%
AEPGX 16%
AGTHX 14%
AMCPX 19%
SMCWX 18%
Suggested mixed portfolio:
ACMVX 8%
AMAGX 10%
EXHAX 8%
FMIHX 11%
FSMVX 7%
FTHRX 17%
JABAX 16%
JMCVX 7%
KSCOX 8%
SMCDX 8%
Suggested Fidelity-only portfolio:
FAGIX 11%
FBALX 13%
FDFFX 11%
FDSSX 19%
FDVLX 20%
FIGRX 5%
FLCSX 21%
My own picks:
FBALX 43%
FDFFX 20%
FDSCX 5%
FIGRX 16%
FSLVX 5%
FSMVX 7%
JAHYX 4%
Looks like my picks have the highest overall Morningstar stars rating of 4.75, the highest returns and are a little heavier in foreign and small cap.
Does my premise regarding AF front load hold water? And if I switch to no-loads, any positive critique regarding the three portfolios? Would you suggest keeping AFs or selling and buying all new no-load funds, like Fidelity? Or, if I’ve kept AFs and started building a new Fidelity portfolio, by retirement I’d have two major families, which allegedly is even more diversified?
Thanks for the input.
Answer Dear Alex:
I've given your question some thought.
Are you coordinating your retirement accounts with your taxable accounts? Or are your retirement accounts all or almost all the securities you own?
I suggest keeping the American Funds. They do have excellent records.
But instead of creating a complicated new portfolio with Fidelity funds, which would require attention and possibly regular rebalancing, I suggest you go with a target retirement fund. That would be simpler; it would require no attention. I'd recommend a Vanguard fund, which would be all indexed.
You own five American funds as of now, and do you want to add 6 or 7 Fidelity funds to the mix?
Re your own fund selections, why Janus High Yield? Why not FAGIX, which is 5 stars and not 3 stars? And why so little in small caps? (Granted, they seem overvalued now.)
The Fidelity-only portfolio seems better diversified. But also unnecessarily complicated. And the high percentage allocated high yield bonds is startling.
You seem very knowledgeable about mutual funds, and maybe you would have the time to manage a complex portfolio--and enjoy it, too. But I'm just suggesting that you consider opting for simplicity.
