Originally Posted by nmhen
I work at a load fund family. I get that question all the time.
Let's do the math. If you invest $1000 with me today, and pay the full load (5.75%), the actual amount you invest drops to $942.50. Using a nice, conservative ROR of 7% (data shows the S&P 500 has posted an average annual total return of 10%, but we need to factor in the expense ratios, and allow for some underperformance so 7%) that $942.50 grows to $1008.47 in one year. So you made up your sales charge in one year.
What about if you were somehow able to buy shares of a stock, or even a bunch of stocks, without transaction fees? In other words, what if you were able to put your entire $1000 to work right away? Well, 7% of $1000 is $70. So you would finish your first year with $1070.
The question for you is: what do I get for my $61.53?
Well, odds are that if you put together your own portfolio of individual securities that you'll constantly be checking on them, worrying about them and obsessing over them.
And what happens if they go bad? Can you call up the company and get reasonable information? Are you going to pore over the financial statements, projections, budgets, etc and be able to make sense of them in a way that alleviates your fear?
No. And if you tried you'd either go insane or lose your REAL job, or both.
Instead, you can pay all the MBAs and geeks who run mutual funds to do it for you. Is that worth the price of a ticket to a Flames game?
And the key here is that after our hypothetical first year you don't pay the load again (though you will continue to pay the expenses - somewhere on the order of 1-2%...and what about "no-load funds"? Do you REALLY get all the same expertise that the load fund guys offer FOR FREE? No. There is no such thing as a free lunch. You might not have to pay a load, but I guarantee you those dudes aren't working for nothing)!
You mentioned 30 years. The people who oppose load funds use compounding as a rationale. They say that you'll never make up that initial $57.50 over the no-load investment. In other words, if you start with $1000 and $942.50 and they both grow at the same fixed rate every year, the person that starts with $942.50 will always have less than the person that starts with $1000. Fair enough, because they're right.
If you extrapolate those numbers over 30 years, the initial investment of $1000 finishes at $7612.25 and the initial investment of $942.50 finishes at $7174.55. That's not an insignificant amount of money. So the argument for load funds over no-load funds is weakened.
But if the decision is between a mutual fund - even with a load - versus doing it yourself I still think you're going to be willing to pay for someone else to manage your money.
If you're dead set against paying a load, index funds offer very low to non-existent fees (even versus the no-load funds) and wide exposure to the market represented by the index (which helps reduce overall volatility).
These are a good catch-all type investment, but you'll see slower, steadier growth.
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