Quote:
Originally Posted by Chipchucker5
Ok thanks! I'm an investment noob. When you say it's worth the load, are you talking about some fee that I pay/paid when buying American Funds? Also, should I be paying off my house or car before putting money into these kinds of investments? Or maybe just start to pay off the house more aggressively, or what?
Yes, almost all American Funds have a front load that is between 3-5.75% unless they were made inside a 401k. If you weren't made aware of it by that financial advisor - toss him. Granted its in the prospectus - he still should have told you.
Its my opinion that if a load fund can outperform on its CAGR the basic underlying index above its expenses (compunded annual growth rate, an average basically) its worth it.
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Just as a simple example:
Hypothetical growth fund has a 5% load and a .65% expense ratio. You invest $10,000 into it and $10k into an index fund with no load and a .2% expense ratio.
After 10 years of 10% interest the index is at $25,423 and the fund is at $23,084. Clearly the index was a better investment.
Now lets say the funds managers can edge out the index by 2% - the fund is now at $27,642
2% doesn't sound like much, but surprisingly the vast majority of managed funds cannot do it when you factor in loads and expense ratios. The fundamental flaw in active mutual funds is that they are almost universally sold based on past performance. While there is technically nothing wrong with that -most folks are sold on that it will continue to happen when there is no guarantee - thats why index investing is the better route for the majority of investors who just want to have money in the market and not try to pick funds or follow the ups and downs of the market.
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As for debt - I'm a strong advocate of debt reduction first - the stress relief of seeing $0 debt could be euphoric to some - however if the debt is manageable (compared to take home pay) and at lower'ish rates for the type of debt then finding the right mix of investing and debt reduction is the ideal route. If the debt is at higher rates for its type of debt, pay it down as fast as possible - but try NOT to ignore investing if it can be afforded.