No Load Mutual Funds: Boost Your Portfolio's Returns

Investors who exclusively use broadly diversified, no load mutual funds for their stock investments often lose out on opportunities to increase the reward potential of their portfolios. This article looks at two methods investors may use to enhance the performance of their portfolio of diversifed, no load mutual funds.

Diversify, diversify, diversify!

Rebalance your portfolio periodically.

These have become the mantra in the post dot-com era. Stocks, bonds, and cash typically form the major asset classes for constructing portfolios of no load mutual funds. Lot of emphasis rightly gets placed on the percentage of assets allocated to no load mutual funds of different asset classes. However, the division of assets within a particular class does not nearly get the attention it should.

All too often, investors exclusively use broadly diversified, no load mutual funds for their stock investments. Fidelity Magellan Fund (Nasdaq: FMAGX) and Fidelity Contrafund Fund (Nasdaq: FCNTX) are examples of popular Fidelity funds investors commonly use. By following this approach, investors often miss out on opportunities to enhance the reward potential of their portfolios.

Investors who exclusively use broadly diversified, no load mutual funds for their stock investments often lose out on opportunities to increase the reward potential of their portfolios.

In a related article, we have looked at how investors can use sector funds to construct a diversified, no load mutual fund portfolio. In this article, we look at how investors can use sector funds to enhance the performance of their portfolio of diversified, no load mutual funds. Although Fidelity funds are presented as examples, the concepts outlined here can be implemented using sector funds managed by other institutions such as Vanguard or T. Rowe Price.

Sector funds confine their investments to a particular sector of the economy. Fidelity funds managed under the Select Portfolios® are sector funds. For example, Fidelity Select Energy (Nasdaq: FSENX) is a no load mutual fund that focuses its investments on various segments of the energy industry such as integrated oil companies, oil and gas exploration and production companies, and oil field service companies.

So how does one use sector funds to increase the performance potential of a portfolio of diversified, no load mutual funds?

Focus on sectors with growth opportunities. An investor having a portfolio of diversified, no load mutual funds may commit a portion of her assets to sector funds that focus on areas having significant growth opportunities, e.g., electronics or software. Some financial professionals call this the ‘core and satellite’ portfolio approach where the diversified, no load mutual fund is the core and the sector fund is the satellite holding. Investments in Fidelity funds like Fidelity Select Electronics (Nasdaq: FSELX) or Fidelity Select Software and Computer Services (Nasdaq: FSCSX) can enable the investor add emphasis on growth sectors such as electronics and software, respectively.

Take a proactive approach to sector investing through sector rotation. Like in the previous case, an investor having a portfolio of diversified, no load mutual funds commits a portion of her assets to sector funds. With this approach, the investor however seeks to maximize the potential of the portion of assets committed to sector funds by periodically switching assets into sectors with higher expected returns.

For example, until not too long ago, major corporations pruned technology related capital spending whereas falling interest rates kept consumer spending strong. To profit from such secular trends, an investor may choose to invest in Fidelity funds such as Select Consumer Industries (Nasdaq: FSCPX) and Select Leisure (Nasdaq: FDLSX) while avoiding Select Technology (Nasdaq: FSPTX). AlphaProfit.com's research indicates that sector rotation has the potential to outperform the market averages on the basis of relative returns as well as risk-adjusted returns. To employ this approach effectively, you need to understand and follow the dynamics of the individual sectors. You must also be able to make informed decisions on sectors to select and sectors to avoid.

The Impact on Your Portfolio. Strong performance from a portion of assets committed to sector funds can materially enhance the return of your portfolio of no load mutual funds. Fidelity funds such as Select Electronics and Select Software and Computer Services sport 10 year average annual returns of close to 18%; this is nearly twice the 10 year average annual return of 9.4% for the Fidelity Magellan Fund. Using tactical, infrequent rotation of assets among sectors, the AlphaProfit's Focus™ model portfolio has increased at an average annual rate of 34.4% since 1993.

So what do these return rates translate to you in dollar terms? A $100,000 investment in a diversified, no load mutual fund that grows at 10% per year results in $259,374 at the end of 10 years. If the same $100,000 is divided such that $85,000 is invested in the same diversified, no load mutual fund growing at 10% per year and the remaining $15,000 is invested in sector funds growing at 30% per year, the assets will total $427,256 at the end of 10 years. That is $167,882 or 65% more than the $259,374 resulting in the former case.

Thus by allocating even a relatively small, say 15%, of the total portfolio of no load mutual funds to sector funds, you can dramatically increase your returns.

Key Points to Remember

1. Investors who exclusively use broadly diversified, no load mutual funds for their stock investments often miss out on opportunities to enhance the return of their portfolios.

2. Sector funds can serve as a valuable return enhancing booster for an investor owning a portfolio of diversified, no load mutual funds.

3. Investors may choose to take a passive long-term approach to investing in sector funds that target high growth sectors of the economy. Alternatively, an investor can take a proactive approach to maximize the potential of sector funds by periodically switching assets into sectors with higher expected returns.

4. Investors willing to look beyond broadly diversified, no load mutual funds have a powerful ally in sector funds. Such investors can materially increase portfolio returns by committing a relatively small fraction of their total assets invested in diversified, no load mutual funds to sector funds.

Notes: This report is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice. This report does not have regard to the specific investment objectives, financial situation, and particular needs of any specific person who may receive this report. The information contained in this report is obtained from various sources believed to be accurate and is provided without warranties of any kind. AlphaProfit Investments, LLC does not represent that this information, including any third party information, is accurate or complete and it should not be relied upon as such. AlphaProfit Investments, LLC is not responsible for any errors or omissions herein. Opinions expressed herein reflect the opinion of AlphaProfit Investments, LLC and are subject to change without notice. AlphaProfit Investments, LLC disclaims any liability for any direct or incidental loss incurred by applying any of the information in this report. The third-party trademarks or service marks appearing within this report are the property of their respective owners. All other trademarks appearing herein are the property of AlphaProfit Investments, LLC. Owners and employees of AlphaProfit Investments, LLC for their own accounts invest in the Fidelity Funds mentioned in this report. They may for their own accounts also buy, sell, or hold long or short positions in any of the other securities mentioned in this report. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from Fidelity Investments. The investment returns and examples provided above are solely for illustrative purposes. Past performance is neither an indication of nor a guarantee for future results. No part of this document may be reproduced in any manner without written permission of AlphaProfit Investments, LLC. Copyright © 2004 AlphaProfit Investments, LLC. All rights reserved.

About The Author

Sam Subramanian, PhD, MBA is Managing Principal of AlphaProfit Investments, LLC. Sam developed the ValuM™ Investment Process for managing investments. He edits the AlphaProfit Sector Investors' Newsletter™. For the 5 year period ending December 31, 2003, AlphaProfit model portfolios increased by up to 288%, a compound annual return rate of 31%. To learn more about AlphaProfit and to subscribe to the FREE newsletter, visit: http://www.alphaprofit.com

Buying Mutual Funds

It looks like the market is ready to start up again so it is time to buy mutual funds, but you only want to invest your money in funds that go up. First, you don't want to start with a loss so be sure to purchase no-load mutual funds. There is no need to ever pay commissions as there are several thousand funds that have no commission whatsoever for either buying or selling.

If you talk with a broker he will try to confuse you that a commission fund is better than a no-load fund. He is lying. Find another broker. Also don't pay any attention to who the fund manager is. All big name fund managers have cold periods when their funds go down.

Another thing the "experts" tell you is look at the expense ratios. Nonsense again. Whether it is 1%, 2% or 3% the only thing you are concerned with is is it going up because that is the net figure for your bank account. If you buy a fund at $20/share and it goes to $40/share do you care if the expense ratio is 10%? (It won't be.) The only thing that counts is the bottom line.

Now the most important thing. Which no-load fund? There are several good sources. Go to the library to look in recent back issues of Investor's Business Daily. On the first page of the second section under "Making Money in Mutuals" near the bottom there will be a box listing 25 to 50 funds. You will want to find the top funds for the past 3 months, 6 months and 9 months sometimes in several different issues of the paper. Don't pay any attention to a longer period of time than 12 months. You want funds that are going up now. In the same paper you will find the toll-free phone numbers listed by the names of the funds.

Or if you can use a computer go to www.smartmoney.com. Click on Mutual Funds. Then click on 25 Top Funds. Here you will find another list of the best performing funds for the past year. Most of them are no-load and if there is a load charge it is shown in the Fee column. There are many Internet sources like this if you want to hunt for them.

Call to be sure they have no redemption fees if you decide to sell them in a short period of time. This is important.

With your computer or you can use one at the library I suggest you go to www.bigcharts.com or www.cbsmarketwatch.com to look up each fund by the symbol. You will immediately see why these particular funds are a good buy. They have been going up even when the general market was going down. As long as this upmove continues you will want to own these funds. When they start down you must sell them to protect your capital and your profits. Never stay with a fund that is going down. Brokers will not do this for you. You must be in charge of your own money.

This may or may not be the start of the next bull market move, but if it is this is the right way to buy mutual funds now or any time. (Cut out and save this column.)

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.

Copyright 2005

al@mutualfundstrategy.com; 1-888-345-7870

How (NOT) to Buy Mutual Funds

When it comes to mutual funds, there is a lot more to success than just finding a good one. Sad investment stories like the following are all too common. I hope my sharing it with you will help you avoid making the same devastating financial mistake one of my former clients made.

This story begins during the height of the investment madness in 2000, just prior to the bear market. I had been managing an IRA account for "Bob" for around six years, with a better than average record of success. So I was surprised when Bob sheepishly called in July, 2000 to let me know he was transferring his IRA account, which had done particularly well during our latest Buy cycle going into the year 2000.

However, his tax preparer, a long time personal friend of Bob's wife’s, was now also offering investment services, having recently received his Registered Representative’s license.

Fast forward to the end of September. It had become increasingly clear to me that the Bull market had run its course. So, in accordance with the Sell signal from our trend tracking methodology, we sold all of our mutual fund positions on October 13, 2000 and went 100% into money market. (See my article “How we eluded the Bear in 2000” at http://www.successful-investment.com/articles12.htm). From our safe haven we watched the market crash and burn, causing most other investors to sustain double digit losses eventually reaching as high as 50 - 60% of their assets.

In 2002 Bob unexpectedly stopped by my office. As it turned out, things had not gone well at all with his IRA investments. As most advisors would have done, his tax preparer/advisor had quickly moved all of Bob’s assets into a variety of “load funds.”

Of course, being newly licensed he was clueless (as were many licensed advisors) as to market behavior or analysis of any kind. The end result was that Bob’s portfolio lost in excess of 50% over the next 2 years. (Not to gloat, but my clients' losses in the same period were non-existent.)

Unfortunately, the degree of loss Bob sustained was experienced by many investors who did not follow a disciplined and methodical approach.

What I find particularly distasteful is that Bob's tax preparer misused his position of trust. He made financial decisions that he was not qualified to make, though his license implied that he did know enough to make them. So now we know what a piece of paper is worth.

This is no different than letting a newly graduated medical student with a fresh MD behind his name perform heart surgery. Or, hiring a new MBA grad to Chief Financial Officer of a Fortune 500 company. Yet the financial services industry allows someone to get a license (after a fairly short course) and to immediately start making incredibly important and far reaching financial decisions for anyone he or she can sell their service to.

This is a worrisome trend in this industry. A CPA friend confirmed that he has been approached many times by firms wanting him to offer investment services.

Why? It’s easy money! Accountants and tax professionals have a great business base. They are in a unique position of trust, because of the information their clients disclose to them. Whether they are employed by a company or they maintain an individual practice, there is probably no other person (other than your spouse) who knows as many intimate details of your financial life as your accountant/tax preparer.

To abuse this trust for personal gain—no matter how noble the motive may appear—is a total conflict of interest and a huge betrayal.

The bear market of 2000 has shown that investing must be a disciplined endeavor. Even most professionals have failed to recognize this. What busy accountant, in the middle of tax season, can put the necessary time and attention to a volatile investment market that may require action at a moment's notice?

As for Bob, he’s still with his accountant, and in the same investments that brought his portfolio down. He’s hoping for a miracle recovery. As of this writing, the stock market is engaged in something of an upswing and Bob, I'm sure, is getting his hopes up that he will recover some of his losses. However, I shudder to think that this rally may come to an end and the bear market resumes. Where will Bob be then?

At 58 years old Bob is still playing Russian roulette with his retirement. He's apparently unable to make a decision to move to someone who has the ability to make sense of market trends and the discipline to follow the signals they communicate. This is a decision that will have a profound affect on his financial future—and will determine whether his story has a happy or sad ending.

About The Author

Ulli Niemann is an investment advisor and has been writing about objective, methodical approaches to investing for over 10 years. He eluded the bear market of 2000 and has helped countless of people make better investment decisions. To find out more about his approach and his FREE Newsletter, please visit: www.successful-investment.com; ulli@successful-investment.com

How to Evaluate Load vs. No Load Mutual Funds

If you have been dealing with mutual funds for any length of time, you undoubtedly have faced the question of which is better: Load Funds or No Load Funds. If you are new to investing, "load" simply refers to the commission paid to the broker selling the fund. "No load" means there is no commission on the purchase or sale.

Most discussions in the past have centered exclusively on performance comparisons. Even rating services like Morningstar have occasionally chimed in with their opinion. However, rather than focusing only on performance, there are some other issues I consider far more important:

1. Who is selling load funds and why?
2. Who markets no load funds?
3. Which one is right for you?

Who is selling load funds and why? Most load funds are being sold through brokerage houses, financial planners and Registered Representatives. With few exceptions, most of those folks operate on the basis of selling as much product as possible. They collect their commissions up front, as a back end charge, or both (usually in the range of 5 - 6%). Whether you make money or not is not their primary concern. What matters most to those operating under this approach is how often you buy—and thereby generate new commissions for them.

Who markets no load funds? No Load funds are either marketed directly by the mutual fund companies or, more commonly these days, offered through discount houses like Schwab, Fidelity, and many others. The advantage to this is that you have an unlimited choice of funds in one place and don't have to open separate accounts for each mutual fund family that you are considering.

Most fee based investment advisors, like myself, have independent relationships with such major discount firms and are able to offer clients just about any no load mutual fund available. They receive no compensation from the firm and only get paid by the client at a pre-determined fee arrangement. Under this arrangement, there is no hidden motivation to sell you a particular fund or to try and sell more in order to get a larger commission.

Which one is right for you? Whether you prefer dealing with someone selling load funds or an advisor getting you into no loads, let me make one thing very clear: You can make money or lose money either way! Why?

Let’s assume for the moment that there is no difference in performance between the types of funds—some of either kind will do well and some of either kind won't. What then determines the successful outcome of you buying either a load or a no load fund?

The key is the advice you’re getting. And the fact is that many brokerage houses and Registered Representatives tend to be more interested in their profits than yours. Their investment advice is generally centered around Buy and Hold or dollar cost averaging and similar financially questionable recommendations. Hardly ever will you receive advice about when and why you should exit the market, either because of accumulated profits or to limit your losses. Getting out of the market is simply not in their best interest, though it may be in yours.

I must confess that, as a fee based advisor, I am somewhat biased and I prefer no load funds for my clients. I believe that this type of arrangement is best for all parties involved. It allows me to avoid any conflict of interest and to work exclusively for my clients’ financial benefit. And the better my clients do, the better I do.

I am able to choose no load funds and make buy decisions solely on the basis of my mutual fund trend tracking methodology. Following its signals, I can get clients into the market or out of it as often as is necessary to maximize profit or protect assets. And because I work with no load funds, other than a very occasional short term redemption fee, there are no transaction charges no matter how many times we move into or out of the market.

If market conditions dictate that we stand aside in a money market for an extended time in order to avoid a bear market (as was the case from 10/13/2000 to 4/28/2003), I can advise that because it is in the best interest of my client. I am always thinking about what will benefit my client, not worrying about lost commissions. (Please see my article “How we eluded the Bear in 2000” at http://www.successful-investment.com/articles12.htm.

Bottom line: Load fund vs. No Load mutual fund shouldn’t be the issue. Having a methodical plan and reliable advice as to when to buy and when to sell is far more important and will help you to secure a prosperous financial future.

© by Ulli G. Niemann

About The Author

Ulli Niemann is an investment advisor and has written about methodical approaches to investing for over 10 years. He avoided the bear market of 2000 and has helped countless people make better investment decisions. Subscribe to his free newsletter: www.successful-investment.com; ulli@successful-investment.com

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