Whatever you do, don’t let your spouse read this chapter or he or she will hate you unless you do what I say. Because he or she will either know you’re not doing as well as you could with your mutual fund investments, or demand the right to a shopping spree. Sound nuts or weird? It isn’t.
Some folks think I’m anti-mutual funds. I’m not. At all! You know they’re a fine vehicle for smaller investors to diversify and get access to professional money management or passive commingled investing more efficiently. But for big investors, they are pretty inefficient and costly. The wealthier you are, the more relatively inefficient they are—and for big investors there are a million better ways to skin that cat. But for smaller pools of assets, the benefits of diversification can outweigh all drawbacks. And mutual funds as a “packaging device” are awfully convenient. Plus, plenty of mutual funds get fine performance.
And you know to pay close attention to the fees with these funds—the higher they are, the more they erode returns. But this is also where folks miss a basic investing truism. I hear from plenty of investors who think their “no-load” mutual funds are just grand. No fees means cheap! Maybe—but sometimes, “cheap” comes at a huge cost. With funds, this is a provable and very slippery slope into potential bunk. Sometimes more is less.
All mutual funds have costs—even “no-load” funds. The load refers to the sales charge or commission, which covers the expense of the guy or gal selling you the fund. Some funds have a big upfront fee—5 percent or more! Some charge a level load of maybe 1 percent (give or take), annually. And some charge a big fee to exit. And, yes, some funds have no sales charges—hence “no-load.” Mind you, even no-load funds have ongoing fees for management and marketing costs. But it’s true—if you buy a no-load fund, you won’t pay a sales commission. Cheap!

“Cheap” Can Be Relative

Or not. Sure, you won’t pay a sales charge, but “cheap” can be relative. In a perverse twist, there’s simply no evidence that investors who buy no-load mutual funds get better returns. But there is evidence that the lack of load motivates investors to behave badly—in ways that impair the returns they get with the funds they own. I’m not suggesting you exclusively buy load funds and wholly avoid no-loads, but I am suggesting there is a little-understood problem with no-loads and an easy way around it.
The problem? The absence of a fee means investors may buy and sell mutual funds more frequently—known as “switching.” Switching is no performance enhancer—revisit Bunk 17. In fact, quite the contrary. It’s usually a performance killer unless you’re a very hot hand at timing, which few are—and if you’re reading this book, you likely aren’t. (And if you’re great at timing, you probably aren’t timing mutual funds anyway.)
The same things that make passive investing much harder to do than people commonly think—resulting in worse long-term returns—can make no-load investors go chasing willy-nilly after hot funds just in time for them to go cold. Or they get unnerved by volatility and sell at the worst possible time—at a relative low. (See Bunk 7.) They think, “Well, at least I’m not losing money on load fees!” Fine! But that’s cold comfort if they end up performing badly relative to what they would have done had they stayed put. For some, the psychological barrier of a fee can give them much-needed discipline—a form of behavioral spine.
From Bunk 17, you know the average holding period for an equity mutual fund is just 3.2 years. That’s average—many hold them for much shorter periods. And that holding period is for both load and no-load equity funds. History shows that load-fund investors hold their funds longer on average than no-load fund investors—dragging up the average. At the very least, funds charging a sales fee create incentive to stay put longer—and that alone can improve your overall performance.
How can you know? An excellent and famous landmark study by finance professors Terrance Odean and Brad Barber looked at investing results by gender. Overwhelmingly, women were better long-term investors. Why? Men tend to suffer more overconfidence. (I’m not being sexist—overconfidence is a bad cognitive error and is fundamentally and provably suffered more acutely by men than women on average, though both sexes have it.) Hence, in the study, men made more frequent changes to their portfolios—trading 67 percent more often than the ladies!1 Women made fewer portfolio changes—and got materially better overall returns—outpacing the gents by a whopping 1.4 percent per year on average.2 If you understand at all the power of compounding interest, you know that’s huge. In a sense, a load is the price you pay for greater discipline—a talisman against changes—which can have long-term benefits far outweighing fee avoidance. A 5 percent load can be fully made up for by holding a fund three years longer.
Again, I’m not advocating for or against load or no-load funds, but I do have a suggestion for those who buy mutual funds—another way to force discipline onto yourself: Buy no-load funds but first make a contract with your spouse. Every time you sell a mutual fund, you must deposit 5 percent of the value into your spouse’s “folderol account” to be spent on anything and everything your spouse likes—and nothing you particularly like. Spa trips, golf, jewelry, sports cars, $2,000 shoes, his or her own investments so they can spend more later—it doesn’t matter what it is—but it’s his (or hers) and not yours. It’s punitive spending to teach you this lesson: Chasing heat has real consequences. As does freak-out panic selling from market volatility. Both can rob you of future returns.
Now, if you can buy no-load mutual funds and hang tight (so long as the mutual fund is appropriate for you and reasonably well run), do it! But most investors can use a little enforced discipline. And the threat of a wild shopping spree may be what it takes to help you see that no-load mutual funds aren’t always so cheap.
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