Author Topic: Mutual Fund Advice  (Read 4118 times)

mrpercentage

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Mutual Fund Advice
« on: May 11, 2015, 05:44:56 PM »
I am getting more aggressive with my kids investments and would like your input.
I am using ANEFX with no sales load. If you had access to this fund with no sales load would you use it? If no please explain why. I'm trying to increase my learning curve here.

I appreciate your input here. I will not argue my reasons for picking it, I really would like to know why I shouldn't. I have access to all of American Funds with no sales load.

MDM

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Re: Mutual Fund Advice
« Reply #1 on: May 11, 2015, 06:27:23 PM »
I am using ANEFX with no sales load. If you had access to this fund with no sales load would you use it? If no please explain why.
At least the "no sales load" makes it a plausible choice.  It still has to overcome a 0.7% fee difference vs. something such as VIGAX.  Sometimes it might, sometimes it might not.  Taking the 0.7% bird in hand (thus not going with ANEFX) seems best to me.  Of course, YMMV.



Indexer

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Re: Mutual Fund Advice
« Reply #2 on: May 11, 2015, 06:35:22 PM »
No.

1.  Its expensive.  Ignoring the sales load it still has a 0.79% expense ratio.  Thats only over 10 times greater than what I pay for the 'average' fund in my portfolio.
2.  Its tax inefficient.  Like REALLY inefficient.  If you held this thing in a taxable account the IRS is likely going to make as much money off it as American Funds does.  To clarify this is assuming you 'held' it.  I'm not even talking about selling it at a gain.  Its a tax nightmare all by itself.  This is less money for you growing over time.  Its after tax returns are no where near its stated returns.  ;)
3.  Its a confused fund.  I personally can't stand funds that mix asset classes together with no real clear reason why.  Its a nightmare to use in a portfolio that has targets for asset allocation.  Its got domestic stocks, international stocks, cash, and bonds all in one fund.  American Funds pulls this crap with most of their domestic equity funds.
4.  Healthcare.  If you look at this things performance it looks good compared to the SP500(which thanks to #3 is not really its benchmark), but it's only because it is pumped up on healthcare.  If you want to be bullish on healthcare... buy a healthcare fund.



5.  Its American funds.  They build funds that... and to quote an AF wholesaler... "have a story."  If you are a commission based financial advisor looking for a quick sale this thing has a story.  It is 'pretty.'  A fee based financial planner would never use it because its going to be a nightmare to build into an asset allocation, an even bigger nightmare when it comes time to rebalance the portfolio, it's expensive, tax inefficient, etc.

Thanks to #3 it doesn't really have a benchmark.  You would have to build one from many sources which would be a pain.  Thanks to #2 even if you kept its benchmark as the SP500 it probably underperformed an S&P 500 index fund anyway.
« Last Edit: May 11, 2015, 06:36:59 PM by Indexer »

mrpercentage

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Re: Mutual Fund Advice
« Reply #3 on: May 11, 2015, 08:10:57 PM »
@Indexer

Is a minors account not taxed differently? You need quite a bit of money for these taxes to take place on the account of someone under 18 right? Serious question. Im not messing with you.

Interesting point on a "confused fund". Although, most people call that diversity. If you want one fund to invest in and nothing else right.. or maybe its heavy on healthcare because that is what was performing and this fund is managed. Not arguing for it, just my thoughts.

I know talking about mutual funds in here is like dancing in gasoline holding a lit zippo-- so I do appreciate both the response and restraint. You all have good reasons for what you do.

On fees... AGTHX is lower in fees but not performing as well lately. I really am just looking for a place to drop it and forget it. Right now I think its ANEFX. If there is an index that truly does blow it out of the water Im interested in learning about it. I know Im in a unique position with no sales load.

Indexer

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Re: Mutual Fund Advice
« Reply #4 on: May 11, 2015, 08:50:41 PM »
@Indexer
Is a minors account not taxed differently?

Yes and no.   It is taxed like an individual account but normally the minor is in a lower tax rate.  Now eventually you hit the kiddie tax and then it is all taxed at the parent's rate anyway.  Since small amounts of taxes get taxed at the minor's rate, but a large amount of taxes can get bumped to the parent's tax rate controlling your taxes is very important.  An individual stock or a well managed stock index ETF(like VTI or VOO) will pay out dividends but it is highly unlikely to generate capital gains.  A minor will likely pay 0% on dividends, and even if there were enough dividends to bump up to the parent's rate they would still get dividend tax rates which are lower than ordinary income tax rates.  The rest of the growth would remain within the investment instead of being paid out as a capital gain.  Then the minor could sell this investment for a gain when he is an adult and needs the money.  If he used it for say college then the tax deductions for the tuition expenses could offset those gains when he sold the ETF to help minimize the tax implication.  With a tax inefficient active fund like ANEFX a lot of the gains are going to come spilling out every year as taxable gains in that year, and any short term gains get taxed at ordinary income tax rates.  VTI= you control when you pay the majority of the taxes.  ANEFX= American funds traders controls when you pay the taxes.

Quote
Interesting point on a "confused fund". Although, most people call that diversity. If you want one fund to invest in and nothing else right.. or maybe its heavy on healthcare because that is what was performing and this fund is managed. Not arguing for it, just my thoughts.

If I want diversity I'm normally going to use a well diversified domestic fund, a well diversified international fund, etc.  When you have the different funds you can say I want 60% domestic stocks and get that, 40% international stocks and get that.  With a fund like this if you want to do something like that you are going to be doing a ton of math using multiple funds trying to get the %s right.  You can get diversification out of one fund, but this isn't that diversified... especially given that about a third of it is in healthcare.  Vanguard's target retirement and lifestrategy funds are all in one funds that use index funds.  These things each have over 15,000 different stocks/bonds.  Very diversified.

Quote
On fees... AGTHX is lower in fees but not performing as well lately. I really am just looking for a place to drop it and forget it. Right now I think its ANEFX. If there is an index that truly does blow it out of the water Im interested in learning about it. I know Im in a unique position with no sales load.

My definition of 'low' fees is <0.1%.  Anything north of 0.5% is insane.   If you want to see well performing index funds I won't cherry pick.  Look at the two most diversified lowest cost stock index funds.  VTI and VXUS.  Cost:  0.05% & 0.14%.  In a 60/40 split that works out to average cost of 0.086%.  Both are super tax efficient as well.  Add them together and it's almost 10,000 stocks.

EDIT:  Just noticed I had kitty tax instead of kiddie tax.  Wow.....  I did that..... 
« Last Edit: May 13, 2015, 05:25:24 PM by Indexer »

forummm

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Re: Mutual Fund Advice
« Reply #5 on: May 12, 2015, 12:23:53 PM »
Personally, I think you should just put their money in VTSAX and VTIAX (maybe 50/50). Probably most of the people on this forum agree. But you probably are already aware of that.

mrpercentage

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Re: Mutual Fund Advice
« Reply #6 on: May 12, 2015, 07:48:12 PM »
My wife says minors don't get taxed for less than 10,000 in annual income (10,000 in gains). Is that true or is she misinformed. I'm not tax savy. I find the subject very dry and generally only learn what I have to. I should probably break that bad habit

Interest Compound

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Re: Mutual Fund Advice
« Reply #7 on: May 12, 2015, 08:22:16 PM »
I am getting more aggressive with my kids investments and would like your input.
I am using ANEFX with no sales load. If you had access to this fund with no sales load would you use it? If no please explain why. I'm trying to increase my learning curve here.

I appreciate your input here. I will not argue my reasons for picking it, I really would like to know why I shouldn't. I have access to all of American Funds with no sales load.

Worst idea ever.  Everyone already explained why.  Just get a Vanguard Target Date fund.

MDM

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Re: Mutual Fund Advice
« Reply #8 on: May 12, 2015, 09:15:57 PM »
My wife says minors don't get taxed for less than $10,000 in annual income (10,000 in gains). Is that true or is she misinformed. I'm not tax savy. I find the subject very dry and generally only learn what I have to. I should probably break that bad habit
She is misinformed.  I'll let you break the news. :)

There is a $10K number that applies to minors, but it is for something other than "don't get taxed."  See http://www.irs.gov/publications/p501/ar02.html#en_US_2014_publink1000220708 for starters.

A dependent does get a $1,000 standard deduction.  Maybe that's what your wife had in mind...?

mrpercentage

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Re: Mutual Fund Advice
« Reply #9 on: May 12, 2015, 09:43:18 PM »
@MDM  awesome assistance with that one. Thank you

Indexer

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Re: Mutual Fund Advice
« Reply #10 on: May 13, 2015, 05:23:48 PM »
@MDM  awesome assistance with that one. Thank you

And then there is the Kiddie tax.  http://www.irs.gov/taxtopics/tc553.html  Basically after that 1k standard deduction the kid gets taxed on roughly 1k of investment return at their tax rate(likely 0%) but the rest of it gets taxed at the parent's tax rate.  It gets more complicated than that, but the layman version comes to down to <2000 in investment income = kids rate, >2000 = parents rate.




Mighty-Dollar

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Re: Mutual Fund Advice
« Reply #11 on: May 13, 2015, 10:35:36 PM »
American Funds New Economy A expense ratio is 0.79%.
If you want large caps then why not just invest in VOO for a 0.05% expense ratio?
After 20 years that .75% will compound and add up to a lot of money. Bottom line is avoid actively managed funds. Buy index funds.

mrpercentage

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Re: Mutual Fund Advice
« Reply #12 on: May 15, 2015, 06:31:43 PM »
Just in the interest of full disclosure so you guys know Im not making up numbers I will share this. You guys do have me combing over everything-- invaluable.

Interest Compound

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Re: Mutual Fund Advice
« Reply #13 on: May 15, 2015, 07:12:45 PM »
Just in the interest of full disclosure so you guys know Im not making up numbers I will share this. You guys do have me combing over everything-- invaluable.




Target Retirement Fund over this same period: 14.69%
Total Stock Index Fund over this same period: 17.49%

Just keep it simple.

mrpercentage

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Re: Mutual Fund Advice
« Reply #14 on: May 15, 2015, 07:48:22 PM »
Yeah I don't think it helped jumping around in funds. No excuses though. That is the numbers. My retirement account is at 13%.. but it was 100% AMECX the whole time.

Indexer

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Re: Mutual Fund Advice
« Reply #15 on: May 15, 2015, 08:22:17 PM »
It all comes down to a very simple equation.

The average investor earns the average returns of the market minus costs(and taxes).

Vanguard index funds = lowest cost 9.99999999999/10.  (There are a couple exceptions.... not many.)

As I noted before the American Funds fund has a really high hurdle to clear.  It has high costs, and do to all the trading some serious tax disadvantages.  It has to outperform the market by a decent amount(1.5-2%, my estimates) given its high expenses and tax difficulties.  This is pretty hard to do. 

So go with the index fund.

If you really want an active fund to get oogly eyes over VPMAX(or VPMCX; its the same fund) is the supermodel in a bikini.  Since she is closed she is just like a supermodel in a bikini.  You can look all you want, but you can't have her.  (Closed fund)


Keep in mind that chart is scaled.  So the the 10k grows to a total dollar figure of 490k for Primecap and that is larger than the SP500(253k), and the Large growth category(172k) COMBINED!  It just about doubled the SP500 over that time frame.  Part of the reason Primecap can pull that off is Vanguard shut it down before it outgrew itself.  It also has low costs for an active fund(0.35% for admiral share), and it has very low turnover(5%).  This makes it low cost, tax efficient, and since Vanguard shuts it down anytime fund inflows run the risk of hurting performance it is allowed to focus on what is does best.  Many funds just want to bring in more assets under management at any cost... even when they ran out of things to invest in.... which kills future performance.

VPMAX is not something to aspire to.  It is the exception to the rule.  It is breaking all the rules that active funds normally follow.  They normally chase AUM; Vanguard prevents Primecap from falling into this trap.  Active funds are normally expensive; Primecap is a Vanguard fund... low cost.  Active funds normally have high turnover and because of that are very tax inefficient; Primecap has a lower turnover than some index funds!  I think when people buy active funds they 'think' they are getting something like Primecap.  The problem is that they are getting expensive tax inefficient funds that are just using marketing to try and drag in more AUM(like ANEFX).

Since you can't have Primecap* you might as well index.

*I am 100% index funds.  The only active funds that I would even consider owning are Primecap, Capital Opportunity, and Primecap Core.  All of these funds are run by the same firm, all sold by Vanguard, and all meet the previous definitions of low cost, low turnover, and Vanguard closes them when assets start coming in too fast......  All 3 are currently closed to new investors. 
« Last Edit: May 15, 2015, 08:24:08 PM by Indexer »