Author Topic: Cleaning Up a Front-Load Fund Mistake  (Read 2441 times)

fluffy

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Cleaning Up a Front-Load Fund Mistake
« on: September 21, 2013, 09:31:32 PM »
Greetings mustachians,

About 10 years ago, my wife and I both bought into a handful of Fidelity and Pioneer mutual funds with a 5.75% front-end load.  Looking back, I realize this was a train wreck of a decision.  The original funds have since been rolled into the funds shown below.  Looking forward we are trying to determine if there is any reason to hang on to these funds or if we should ditch them all and simply consolidate them with our Vanguard accounts.

Roth IRAs: ORIGX, PIGFX, FNIAX, FIAGX, FSTAX, FSCDX
Joint Taxables: ORIGX, PIGFX, FCVAX, FNIAX


When comparing my old funds to what is available today, should we be focusing exclusively on the expense ratio of each respective fund?  (for the most part they are all higher than any of the comparable index funds at Vanguard) Do front loaded funds offer any advantages?  Would it make the most sense to cut our losses and chalk it up as an expensive lesson learned.

Overall the front-loaded funds make up a relatively small portion of our 'stache (about 25%).  But we are still funding the ones in our Roth IRAs (we have not yet reached the original purchase amount so we aren't paying any more loads).

Any wisdom you can provide would be much appreciated.

-Fluffy

superannuationfreak

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Re: Cleaning Up a Front-Load Fund Mistake
« Reply #1 on: September 22, 2013, 03:17:20 AM »
If there aren't gratuitous exit fees, in general you're best off taking the hit and moving them over.  It's not just you - it's a lesson most of us have learnt the hard way too.

There's no evidence that active fund managers can do better over the long run than an index fund.  Doing a quick google it looks like those funds have expense ratios around 1% or higher so you'll also be paying lower ongoing fees with low-cost index funds.

Some of those funds may overlap so you may find you won't even need so many funds, so you can simplify your holdings, save money and get better expected performance.
If you haven't read them yet, I enjoyed this series after MMM recommended them: http://jlcollinsnh.com/category/stock-investing-series/
More general information can be found on the bogleheads wiki, e.g. http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit
Or specific asset allocation ideas are often requested/discussed on their forums: http://www.bogleheads.org/forum/index.php

GreenGuava

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Re: Cleaning Up a Front-Load Fund Mistake
« Reply #2 on: September 24, 2013, 09:55:58 AM »
Any tax-advantaged account is worth moving:  get the Roth IRA to Vanguard right away.  Figure out which asset classes you want and get the appropriate funds there.  You'll pay only the exit fee from whoever holds your account.  Put future contributions in through Vanguard (note: the limit is per year, not per account - moving to Vanguard doesn't reset the $5500).  This will keep you with low expenses and without paying loads at any point.

The taxable is a bit trickier, because getting out of the funds involves capital gains taxes.  The load is lost, but you still want to get out of the high expense ratios.

Who holds the funds?  Is it now self-directed at Fidelity or is through a financial manager?  If the latter, opt out of having this person manage your funds, because the goal is to get out of them.

First, stop re-investing the distributions (dividends, etc).  Those are taxed when they happen anyway, and the funds you want the money in don't charge loads.  Use those to contribute to other parts of your stash that are in better funds.  This will also ensure you don't have any portion of the fund resetting the clock on long-term gains.

Next, look into which funds are at a loss - you can use losses against gains to minimize the tax bill of the sale.  Alternately, look at how much is in short- or long- term gains;  the latter is taxed at a lower rate, but if it's much larger than the short-term gains, you might want to consider selling some or all of them now.   Alternately, if short-term gains are significant, it might be worth it to wait until a year has passed since the last contribution for everything to be at long-term rates instead.

(someone should chime in to determine if selling taxable mutual funds affects AGI for purposes of Roth IRA limits;  I don't know the answer to that)

As for setting up the new taxable stash, check out Principles of tax-efficient fund placement -  if you're holding international stocks (and I believe you should), hold it in taxable (if your portfolio spans both tax treatments).