What Should I Know When Buying Mutual Funds?

starting off this hour as California chat is calling hi Chad how are you good how are you doing Dave better than I deserve sir how can I help I had a question about a mutual fund I'm just starting to do the investing part and I went to a broker and I'm finding some good mutual funds with the good percentages like you say with the front-end load B being about 5% 5 and 35 and 3/4 is what most of them are yeah yeah yeah I was just wondering if that's 5 whatever you said that five and three quarter percent is that when you take you say that 12% return would that mean that I'm really only getting 7% what's not five and three-quarter a year it's five and three-quarter the first time you put money in okay see I'm still I don't know everything and I was like that's okay let's talk through it there's basically three ways you can get at this okay there's what are called loaded mutual funds which are mutual funds that have a commission and there's no load mutual funds that don't have a commission there's two types of ways to get at the loaded funds let's talk for it for a minute we'll use you as a teaching opportunity for all our listeners is that okay okay yeah you just walk through me with this and you're getting questions you interrupt me as I go okay to start with a no load fund is not sold through a broker you buy them directly from a company and you'll see their advertisements in magazines and on websites and things it's companies like Vanguard and fidelity okay and that they are they are primarily no-load which means they don't charge a commission now no Commission does not always mean cheaper for two reasons one is there's two or three ways they charge fees on mutual funds all mutual funds have a maintenance fee annually okay okay based on your balance at that time so let's say you had $100,000 in there and the maintenance fee was three quarters of a percent that'd be seven hundred and fifty dollars that you were charged as a fee for maintenance in the mutual fund okay now a no load mutual fund has a maintenance fee so you're still gonna have a fee it just doesn't have a commission doesn't have the five and three-quarter or the other kinds of commissions we're going to talk about in a few minutes so you do have a fee now let's say that you let's go back to our five and three quarters example okay let's say that you put $100,000 into that fund with that broker and you paid the commission of five and three quarters then will that be five thousand seven hundred fifty dollars right yeah that you paid upfront now then your maintenance fee on that fund let's say it was a quarter of a percent only 250 a year so for ten years I'd be twenty five hundred dollars after ten years you would have paid in maintenance fees two hundred fifty a year times ten do you follow that yeah okay and then you'd have paid the fifty seven hundred on top of that and so we're talking about seven thousand bucks and some change over ten thousand dollars you're following me yeah over ten you know now the other one let's pretend it had a I looked at one the other day that was a no load that I didn't buy because it was a ripoff I thought but it had over a one percent maintenance fee it had a one point two percent maintenance fee okay so twelve hundred dollars a year right yeah for ten years on a hundred thousand that's twelve thousand dollars Wow okay so you paid the Commission on the other one but it was cheaper do you follow me yeah that's what in my mind I thought oh if I can go around the broker I'm gonna make a lot more money but like not but not if you get one with a high maintenance fee yeah so you got it you got to watch they get you on the back if I don't get you on the front now now there are good no load funds that have reasonable maintenance fees and sometimes I buy a no load fund okay I'm not against them I'm just warning you that no Commission does not always mean cheaper you have to dig a little deeper to figure that out okay yeah so that's the first thing then the second thing is with Commission's there's basically two ways that people are charging now one is they're doing the five and three quarter up front like you're talking about which are a shares okay and the second way is that they're doing what are called C shares and the brokers will manage your whole portfolio for you instead of charging you a commission upfront they'll do it for 1% a year okay hey which is not a bad deal because you got a broker there to advise you and teach you and help you for every year if you got a good broker that's involved and you can call them you know you see a bad news story about something and you're worried about the stock market dropping 400 points last week in one day and you want to call your broker you got somebody to talk to and there's actually research ad that shows that if you have a good broker in your corner you tend to make more because you tend to not make as emotional to the decision okay that makes sense right there I guess that's worth it yeah it's worth it to have a coach there's research that indicates that lots of it as a matter of fact so you could do the 1% deal where they just charge you 1% a year and there's no Commission but they charge you 1% fee to manage everything but they're there at your beck and call if you need them you know and if you put want to put more money in there's no fee except the next year you're gonna get a 1% bill on that money that you put in on top of everything else you put in but again again some people love that and they act like that the people that charge 5 and 3 some of these people have a holier than thou thing in the in the financial world and act like the people charge in five and three-quarters are ripping somebody off but let's do the math again because these are the exact same two mutual funds just two different ways to charge it in a commission 1% to manage it or 5 and 3/4 up front so let's take our hundred thousand again five and three quarters is five thousand seven hundred and fifty dollars okay one percent on a hundred thousand if it doesn't grow at all which would be bad really bad but if it doesn't grow at all one percent $1,000 a year for ten years is ten thousand dollars so even if you do the 1% with quote no Commission you pay more okay so better to do the eighth year yeah as long as you leave it alone but if you want to buy and sell the funds inside of there and you want to move some stuff around later on you know you're going to pay that stinking 500 every time you move it around so the truth is all three of those work and I'm okay if you do any of the three as long as you look at them carefully for your situation and you decide I used to be a huge proponent only of the five and three-quarter upfront because of what we just did but the one percent thing is fine and the no-load is fine but you're not holy if you you know some of these the guys in the financial world of Pharisees and they're like oh I'm a 1% guy and so these other guys are ripping people off with the Commission up front and then the people who don't want anybody to ever be charged a commission or saying anybody who charges a commissioner ripping people off it's just not mathematically true you know okay so yeah I read that online that yeah there's a budget and I read one on Forbes today the guy's like anybody charges a fee is a is a ripoff artist and there's a used car salesman well that's just not true there's some of yeah there's some of them that are but if you're you know I believe in paying a real estate agent a good Commission could usually sell the house faster and for more money so sometimes the Commission is worth it you just have to get somebody a that knows what they're doing and B you understand what you're getting in on so Amen good question thank you for joining us and let me use you to teach this is the Dave Ramsey show hey guys thanks for watching if you enjoyed this video click the subscribe button to get the latest content and check out these other great clips from the show you can do this you know that really is a message whether you've got two hundred seventy thousand dollars in student loan debt or 27 thousand well you've got a fifty thousand dollar income or $500,000 in common

Channel: The Ramsey Show - Highlights

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Id: JUk9WCD-QtA

Length: 8min 25sec (505 seconds)

Published: Thu Sep 15 2016