Food For Thought

Friday, April 25, 2014

Fees In Mutual Funds

Mutual Fund Fees

Mutual funds are the most popular choice for diversified funds in today's marketplace (though ETFs are fast on the rise, and MLP’s, REITS, BDC’s can be better due to having both dividend and value growth potential). However, for all of their popularity, some investors still do not fully understand the fee structure and all of the possible charges that can be associated with investing in one of these products, and this is what I would like to share with you this week.

•Expense Ratio: The most obvious and up-front cost, an expense ratio or management fee, is paid each year to the fund's management team out of the fund's assets. The average mutual fund charges 1.3% to 1.5% each year, which can add up quickly and eat up your position over time. When stated as a percentage of assets, average fees do look low — a little over 1% of assets for individuals and a little less than one-half of 1% for institutional investors. But the investors already own those assets, so investment management fees should really be based on what investors are getting in the returns that managers produce. Calculated correctly, as a percentage of returns, fees no longer look low. Do the math. If returns average, say, 8% a year, then those same fees are not 1% or one-half of 1%. They are much higher — typically over 12% for individuals and 6% for institutions.

•Transaction Fees: Most funds will charge a fee when making your initial purchase and some will also charge a redemption fee, which comes when you sell the fund. Both of these fees are paid to the fund, making them different charges than the next two items on our list.

•Front-end Load: This is a fee charged at the purchase of some funds; it is paid to the brokers that sell you the product. A front load is usually charged as a percentage and comes out of your initial investment. If you were to buy $10,000 worth of a fund that charged a 3% front-end load, $300 would go to the broker, while $9,700 would actually be invested.

•Back-end Load: This works the same way as a front-end fee, but it is charged when you sell certain funds. Back-end fees typically taper off as time goes on; for example, the fund can charge 3% if you sell within one year, 2% within two years and so on. These typically won't hurt a long-term investor, but they can be a nasty surprise if you need to exit a position earlier than anticipated.

A no-load fund sells its shares without a commission or sales charge. Some in the mutual fund industry will tell you that the load is the fee that pays for the service of a broker choosing the correct fund for you. According to this argument, your returns will be higher because the professional advice put you into a better fund. There is little to no evidence that shows a correlation between load funds and superior performance. In fact, when you take the fees into account, the average load fund performs worse than a no-load fund.

•Account Fees: Certain companies will charge investors an account fee, which is a cost associated with the maintenance of an account. These include necessities such as postage, record keeping, customer service, cappuccino machines, etc. Some funds are excellent at minimizing these costs while others (the ones with the cappuccino machines in the office) are not.

• The last part of the ongoing fee (in the United States anyway) is known as the 12B-1 fee. This expense goes toward paying brokerage commissions and toward advertising and promoting the fund. That's right, if you invest in a fund with a 12B-1 fee, you are paying for the fund to run commercials and sell itself!

Not all mutual funds will incur the aforementioned fees, and there are plenty of options that manage these costs quite well. Still, investors should watch out for the fee structure associated with any mutual funds they purchase and be sure that they understand the costs associated with the investment. If a fund has a fee structure that you are not comfortable with, try looking into ETF’s, REITS, MLP’s & BDC’s, those products are often more cost effective and still offer most of the advantages associated with mutual funds, to include dividend growth and greater value growth potential.

Happy Investing

Suburbantrader.info

Disclaimer: Suburban Trader is a publisher of financial news and opinions and NOT a securities broker/dealer or an investment adviser. You are responsible for your own investment decisions. All information contained in our newsletters or on our web site(s) should be independently verified with the companies mentioned, and readers should always conduct their own research and due diligence.

Monday, April 7, 2014

Rip Offs

I’ve shared with people that I talk to for years that I thought that the typical 401(K) plan was a rip-off, a path to mediocrity. One important key to investing is to monitor your investment expenses and if you begin to look into your 401 (K) holdings that would be an excellent place to start. For most of you that don’t know that not only are 401 (K)’s predominantly mutual funds, but that mutual funds normally offer two types of shares and they are Institutional and Retail shares. The main differences between the two are the fees. In the event you make the wrong choice on which ones to purchase you can say goodbye to huge amounts of your money.

There is a case going on at the Supreme Court in Washington that involves $3.8 billion in assets and some 20,000 folk that would like to retire. The goal of the court is to decide whether the plan’s sponsor, EDISON INTERNATIONAL (NYSE: EIX), is at fault for purposely putting its employees in high-free retail shares in order to slash the company’s administrative costs by $8 million.

Why is the Supreme Court interested in this case you ask? Mainly because what has happened at Edison, happens across the financial world daily. Unsuspecting investors subsidize the wealth of the well-informed. The uneducated investors believe that the “institutional” shares sound like something that only the likes of a Goldman Sachs or a Berkshire Hathaway have access to, however that idea is completely false. In the case for many funds, the only qualifying factor is the minimum investment. There are some retail shares that may have a minimum investment as low as $500, however, if you have $10,000 to invest (and sometimes less), you can get the so-called institutional shares. The shares and the management of the shares are the same but the differences in the fees are huge. The Oxford Club uncovered one that had a low 0.05% in annual fee for its institutional shares but the ones that purchased the retail shares were hit with a 0.17% in management fees. As you see over the course of your investing towards retirement the compounded difference is tens of thousands of dollars.

The writers of the Oxford Club were given access recently to an eye opening report prepared by some of the nation’s top financial scholars. Professors Ian Ayres of Yale Law School and Quinn Curtis of University of Virginia just released a paper called “Beyond Diversification: The pervasive Problem of Excessive Fees and Dominated Funds in 401 (K) plans.” A full 16% of the plans the duo studied had fees so high that “young investors would be better off forgoing tax benefit and investing in stand-alone funds.” This is what we at Suburban Trader suggest then set up a Trust Fund. Even worse, they saw that several plans offer mutual funds with negative guaranteed interest rates. It is amazing what a little research can turn up, so many people have 401 (K)’s that have fees that are so exorbitant that the supposed tax savings are destroyed. Fees are so high that the only person getting rich from the plans are the folks selling the mutual funds. If you like your 401 (K) fine, but do some research of your own and look at some low cost options.

Great Investing.

Friday, March 21, 2014

Natural Gas

I told several people a few years ago that this was going to happen but they didn’t believe me then, now here is a little proof of what is going on around us. If I were to ask you to name the state with the fastest year-over-year natural gas production growth, which would you guess? Since most people may not know let’s get right to the answer. It's Pennsylvania. Marketed natural gas in the Keystone State grew an eye-popping 72% from 2011 to 2012. That moved it from the seventh- to the third-largest gas-producing state in the U.S. The state of North Dakota is now number two just behind Texas as the largest oil producer in the U.S. and has more jobs available than people to work.

Pennsylvania's gas is coming from the Marcellus Shale deposit, which runs through the central part of the state from north to south. Production in the Marcellus began only five years ago. But now it produces about 18% of all natural gas in the U.S. The fact is, as the U.S. Energy Information Administration (EIA) reports, "Marcellus production alone accounted for 75% of all production growth over the past year in the six basins covered in EIA's recently released Drilling Productivity Report (DPR), which highlights the latest regional trends in drilling, completion, and production from gas- and oil-producing wells."

An even more amazing fact is that if Pennsylvania's Marcellus Shale field were a country, it would be the world's eighth-largest natural gas producer. Incredibly, it now out produces Saudi Arabia. The production at Marcellus has shocked experts like Sam Gorgen of the EIA and Terry Engelder, a Penn State University geologist. Engelder, a leading researcher of the formation, predicted that Marcellus production wouldn't hit the 12 Bcf/d rate until 2015. So much for that... the Marcellus is already there. Marcellus production has already surpassed 14 billion cubic feet per day (Bcf/d).

At present the Marcellus' production is equivalent to about 550 million barrels of oil per year. The growth rate in new-well gas production per rig continues to rise, even as exploration and production (E&P) companies drill more of them. Why is this? With each well drilled, E&P companies gain a greater understanding of the underlying geology. They combine that knowledge with continually improving fracking techniques. The result: a continual rise in well production rates. This growth in production rates is likely to continue in the future. That will mean a faster and higher rate of return on Marcellus wells. It also means drillers can make money even with natural gas prices at today's low levels.

We have a couple of companies that we have in our portfolio that are involved in the movement and drilling for natural gas and we will be adding two more to our portfolio for our subscribers today. Out of consideration to our paying subscribers I’m unable to reveal their names, however, the good news for you is that they are not the only ones drilling in that area or involved in the production of natural gas. Being that it’s in your back yard don’t miss out on a great opportunity to cash in on it.

Friday, March 7, 2014

Investment Idea

One of the biggest myths to me in investing is the old adage, buy low and sell high. I’ve made money by always favoring the stocks that have rising prices. While buying a stock at a lower price makes a lot of sense, it can still be misleading. I remember I had an opportunity to by Toyota from $30 a share up to it finally reaching $82 a share, I purchased it at $82 and some change about two years ago and it sets at around $114 a share today. One of the reasons I don’t necessarily look for a stock when the price is at a low point is because you never know when the stock is going to hit its bottom. When you purchase your stocks on the way down it lessens your chances of winning. Most investors dream of buying a stock at its low point and riding it to the stars, that’s a fantastic desire but very seldom happens. Choosing stocks with rising prices not only obviates that problem but offers several advantages. One of the main things is that in buying a stock that is rising in price is the fact that it is already doing what you want it to do; go up. Also, a stock that is hitting new highs has essentially no overhead resistance. In a book by Bart Diliddo, PHD “Stocks Strategies & Common Sense,” he teaches on buying stocks after they have hit their 52 week high. It is at this time that the stocks have had plenty of time to consolidate, and are showing new signs of life.

Always, if you’re looking at doing this on your own, pick safe stocks and undervalued stocks with rising prices. Here are some steps in his book that I’ve found to be helpful in finding great stock picks that you want to rise in share price and not necessarily looking for a dividend:

Look at the financial section of your local paper, the Wall Street Journal, Investors Business Daily Barrons, the internet. Find the list of stocks that have just hit new 52 week highs. All of these stocks are definitely rising in price.
Rank all these stocks in ascending order of Price to Earnings ratio, P/E ratio. While this may take some work on your part. Look for low P/E ratio stocks of course, they are undervalued.
Assess each stock for safety. To do this look at Standard & Poor’s Stock Guide, Yahoo Finance.
Finally put all the information together in a logical, unemotional way. Pick the ones you think are the safest, most undervalued and rising in price the fastest.

Common sense and simple logic dictate that picking safe, undervalued stocks rising in price should result in above average performance. If you don’t have the time we can do it for you with a subscription to Suburban Trader; it is only $10.99 a month for our weekly and bi-weekly stock picks.

Happy Investing

Monday, February 10, 2014

Attitude

Attitude

A little girl walked to and from school daily. /though the weather that morning was questionable and clouds were forming, she made her daily trek to school. As the afternoon progressed, the winds whipped up, along with lightning. The mother of the little girl felt concerned that her daughter would be frightened as she walked home from school. She also feared the electrical storm might harm her child.

Full of concern, the mother got into her car and quickly drove along the route to her child's school. As she did, she saw her little girl walking along. At each flash of lightning, the child would stop, look up, and smile. More lightning followed quickly and with each, the little girl would stop and look at the streak of light and smile. When the mother drew up beside the child, she lowered the window and called, "What are you doing?" The child answered, "I am trying to look pretty because God keeps taking my picture."

Thought: Face the trials that come your way with a smile of hope! Churchill says, "Attitude is a little thing that makes a big difference."

To Your Blessings and Successes!

Sunday, February 9, 2014

Five Investment Risks

This week is a short one; I just want to quickly share with you Five Investment Risks to avoid and an allocation of stocks structure.

Here are Five Major Investment Risks to avoid:

1. Being too conservative. This means your net worth doesn't grow fast enough to exceed inflation or meet your investment objectives.

2. Being too aggressive. Extreme optimism is a benefit in the business world but can be your undoing in volatile financial markets.

3. Trying and failing to time the market. Remember that there are only two types of market timers: those who don't know what they're doing and those who don't know they don't know what they're doing.

4. Using expensive fund managers who underperform their benchmarks. As more than 95% of them do over a decade or more. ETFs and Vanguard index funds are effective, low-cost and tax-efficient.

5. Unwise delegation. Bernie Madoff and his ilk can't run off with money they don't manage.

If it is one thing that we have learned over the years at Suburban Trader is not to try to analyze and follow the right predictions, but make sure that we are following the right principles. As one of the great investors in this present time Alex Green, we always attempt to asset allocate properly, diversify broadly, minimize our taxes and expenses and rebalance annually. The following is a good asset allocation to look at when purchasing stocks that pay dividends or any stock for that matter.

The first asset allocation exercise you should do with your dividend portfolio is to look at all the economic sectors which is the foundation of Suburban Trader’s portfolio:

Basic Materials

Communications

Consumer, Cyclical

Consumer, non-Cyclical

Energy

Financial

Industrial

Technology

Utilities

Ideally, a good dividend asset allocation would include dividend stocks from each sector, which is how we do. Therefore, you are not only picking solid dividend payers but you also invest in different sectors that will react differently to economic cycles. This will allow you to have a smoother investment return over the long run. Now after looking at the different sectors you might also want to look at different countries. It easy to trade Canadian stocks here in the US and they are known to pay higher dividends than the US in their Energy sector. And no matter what sector or country do not forget to always set at least a minimum of a 25% trailing stop.

To your Investing Success

Suburban Trader

Monday, February 3, 2014

INFRASTRUCTURE

One of the things that the President mentioned last night during his address was the fact of building up our infrastructure; while that is good news as investors we need to be careful in the way that we may invest in order to capitalize on it. Infrastructure alone is no precursor to economic growth. The late British economist Peter Bauer pointed out in his extensive research that infrastructure alone is insufficient to assure growth. According to Bauer, infrastructure develops in the course of economic development, not ahead of it. In other words, economic development and infrastructure develop in tandem, with growth powering infrastructure spending. To build, and then to expect “they” will come, is folly. Build a magnificent urban infrastructure in Antarctica and that's all that will exist. Infrastructure arises as needed; infrastructure follows, it doesn't lead. This is no matter of small importance: To be a successful investor you must understand the economic consequences of your investments. If you don't, you invest at the whim of speculators.

The problem with many infrastructural investments is that they adhere to a one-and-done paradigm. Sustained value is difficult to gauge. Once a bridge is built or a road paved, that's it. Contractors must scramble to ensure another bridge to build or road to pave is in the waiting. Concurrently, they must maintain the expensive fixed capital to ensure they can build or pave if a bridge or road is in the waiting.

The safer course is to invest in infrastructure that creates value, and then does it repetitively on the initial investment. After all, it's riskier to continually find new projects than to continually tap established projects for revenue, earnings, and cash flow. In other words, the infrastructure company itself must have a stable infrastructure. In looking at that we believe that we have found such a company this week for our members that meet those criteria. The company itself has a stable infrastructure, it has a 27% upside potential over the next 12 to 18 months and at present it boasting a 6.61% dividend yield with the potential of increase, and its paying .87 a share.

Remember you can’t make income if you don’t get in the game and play.

Suburban Trader