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Don't ignore fund fees if similar rivals are cheaper

The Baltimore Sun

I am 26, and recently started a Roth IRA. The only fund I bought is called Principal Investors Sam Strategic Growth A (SACAX). I've got just over $3,000 in it. As far as I can tell, it's a good fund. I compared it with the large-blend category it is in, and also to the S&P; 500, and the fund has outperformed for the last seven years. The average annual return over the last 10 years has been about 9.9 percent. But you have warned about high fees hurting fund investors, and I'm a little uneasy about the load and expenses I am paying.

- M. M., Delaware

Your analysis is impressive.

Too many novice investors simply look at how much money people have been making in a fund, and if the number looks large, they figure the fund is a winner.

So, for example, if they see one fund that climbed 29 percent during the past 12 months, and another that was up 19 percent, they figure they should choose the one that was up 29 percent.

But people can hurt themselves if they don't realize that the market runs in cycles. For a while one type of stock or bond is a winner. But with time, today's winners can become losers.

You obviously realize this. So you focused on something more reliable to examine the quality of your fund. You looked at the category where it is classified, the "large-blend" category.

You compared your fund with similar funds - those choosing large-company stocks rather than small-company or international stocks. You also found that your fund has behaved better than the Standard & Poor's 500, the stock market index that measures how large-company stocks are doing.

That's the right way to look at a fund.

But in the case of your fund, the comparison is a little misleading. Even though analysts lump your fund into the large-blend category, it doesn't fit that category precisely.

You have what's called an "asset-allocation" fund, which blends large and small U.S. and international stocks. Because it has mostly large stocks, you find it compared with other large-blend funds.

But the small and international stocks - which have been riding an extraordinarily strong cycle for the past few years - make your fund look more outstanding.

That said, you do have a solid fund that has performed well.

What is of concern, however, is that you are paying fees for this fund that are higher than some comparable funds.

Mark Wilson, a financial planner in Newport Beach, Calif., notes that you are paying a 5.5 percent load - or a sales charge - for your fund. That eats into the money you can make.

When you pay a load, that money goes to your broker or adviser, instead of into your fund.

So if you intend to invest $1,000 a year, you will actually invest only $945 in the fund, and $55 will go to the broker. That may not sound like a major issue.

But you can't make as much money when $55 out of $1,000 never makes it into your account. And every time you deposit money you will pay more: If you put $1,000 into your fund next year, you will give up another $55.

Wilson says that if you had invested $1,000 in your fund each May for the past 10 years, you would have ended up with about $15,300 this May.

If you had instead invested $1,000 each year in a similar asset-allocation fund that did not charge a load - the T. Rowe Price Spectrum Growth fund, for example - you would have ended up with just over $17,000.


Gail MarksJarvis writes for Tribune Media Services.

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