Thursday, October 11, 2007

American Funds: My Choices, My Selections

just in case you stumbled here from the "internets", I should probably say that I have no idea what I'm talking about here, and if you are looking to be seriously informed you should definitely look elsewhere. This is my own personal journey through my own personal SIMPLE-IRA and it is a discovery process for learning about mutual funds, IRAs and personal finance in general, and I'm really writing this just for myself, hoping it will be a good reference in the future and at the very least a benchmark for a particular point in my life. That being said, you are more than welcome to come along and if you find it informative I couldn't be happier. But if you don't, well, I won't be any less happier I'll just say.

So I have a SIMPLE-IRA at work and I have a somewhat limited list of mutual funds to pick from. I have been investing in them for 5 years this month in them so far. These funds are provided through American Funds. I will first go over what led me to pick the funds I did, some recently discovered concerns, and then why I am seriously considering changing my strategy here lately.

A SIMPLE-IRA is probably off the radar of a lot of Americans and the its differences make me hesitant to just refer to it as just an IRA. Its a plan available to small businesses that kind of like a "Poor man's 401k" if you will. Employees can contribute up to $10,500 (?) , which is more than a regular IRA, but not quite as high as a 401k. There is Employer matching up to 3%. I believe it has lower administration costs than a 401k, and there might be some tax incentive for the small business. I have just opened up a regular ol' Roth, but that is already another post.

So I have progressed from a starting point of 3%, and made my way up to 9%, trying to get myself up to 12 or 15 originally thinking it was just better if I didn't see it in the first place. But that was before I actually started worrying about this stuff. Now it seems a more informed strategy might be to contribute up to the match, then max out my Roth each year and go back to contributing to the SIMPLE-IRA if there is anything left over, or ideally what I would need to get to 15% or beyond. I hadn't even thought about the option until recently that American Funds will probably let me write them a check at the end of the year (or in April of the next) to fill in what I might want to. I'm not for sure if I can, but I can't imagine why not. Especially if I owe some taxes. But I won't have to worry about that anytime soon.

But even as I may move to apply less to this plan and more to the Roth, I still need to make sure that it is properly positioned. So here are the original choices:

American Funds Amcap A (AMCPX) B(AMPBX)
American Funds American Balanced A (ABALX) B(BALBX)
American Funds American Hi Inc Tr A (AHITX) B(AHTBX)
American Funds American Mutual A (AMRMX) B(AMFBX)
American Funds Bond Fund of America A (ABNDX) B(BFABX)
American Funds Capital Inc Bldr A(CAIBX) B(CIBBX)
American Funds Capital World Bd A (CWBFX) B(WBFBX)
American Funds Capital World Growth & Income A (CWGIX) B(CWGBX)
American Funds EuroPacific Gr A (AEPGX) B(AEGBX)
American Funds Fundamental Invs A (ANCFX) B(AFIBX)
American Funds Grth Fund of Amer A (AGTHX) B(AGRBX)
American Funds Inc Fund of Amer A (AMECX) B(IFABX)
American Funds Intm Bd Fd of Amer A (AIBAX) B(IBFBX)
American Funds Invmt Co of Amer A (AIVSX) B(AICBX)
American Funds New Economy A (ANEFX) B(ANFBX)
American Funds New Perspective A (ANWPX) B(NPFBX)
American Funds New World A (NEWFX) B(NEWBX)
American Funds Smallcap World A (SMCWX) B(SCWBX)
American Funds US Government Sec A (AMUSX) B(UGSBX)
American Funds Washington Mutual A (AWSHX) B(WSHBX)

Before I knew much but needed to decide what to get into, what rudimentary research I did do led me to believe I should look at some historical returns, long track records and the often overlooked by the new investor expense ratio. The expense ratio is important because it will be lopped off the top of any gains. So an investment that gives you an 11% return but has a 1.75% expense ration is actually worse than getting a 10% gain with a 0.5% expense ratio.

So what research I did at the time led me to pick the 7 funds I have in bold. Most of the bond funds were out right away. I'm too young (but no spring chicken) to have anything in something so conservative besides a savings account. But the ones I picked seemed to have the best combination of lower expense ratios and the highest consistent historical gains. In the coming weeks I plan on analyzing these choices and possibly refining my choices for the first of the year. That way I have plenty of time and won't go off all half cocked again without being better informed.

Notice there are two ticker symbols, one for A and one for B. When I first got in, there was a miscommunication and I thought I HAD to get B shares. So I based my assumptions on the B-share ticket information. The difference is that American has loaded funds, particularly what are called Front Loaded Funds. This means you have to pay a sales charge before you can invest your money. With A shares, you pay it all at once in the beginning. B-Shares kind of spread out the payment over 7 years in the form of a higher expense ratio, significantly higher. Like maybe a whole percentage. But then they turn into A-Shares. After a year or so of this I discovered that I could put them into A-Shares so I did, but kept my fund choices the same.

This was slightly fortuitous for me because I then tracked these shares shares separately. I have a variable income, so it is kind of hard to extrapolate gains on the A share portfolio because I am still contributing and it's kind of hard to back it out. But the B-Shares are just sitting there growing without contributions so I can see how they perform, and the A-shares should do better with the lower expense ratios. But when I analyzed the last three years of what was going in and what the gains were they were actually horribly low in comparison. While the B-Shares were collectively up 11% over the last 3 years, the A-Shares were around 8% when I annualized the gain.

It sort of freaked me out until I realized this is the effect the front end load causes. In a portfolio effectively less than 3 years old the sales charge is putting a massive hurt on where this money could be making in a comparable no-load fund. No load funds don't charge these fees. These particular fees anyway. I also found out that the brokers might also be getting a cut of it. So that really inspired me to see if I could somehow do better on this situation.

It is also is what is making that no-load Roth look attractive. It also might make a traditional IRA look better if you have better choices, like perhaps more no load and Index funds (which have extremely low expense ratios). One thing that I noticed was that a lot of the funds that I chose seemed to just follow the S&P if you look it on a graph. So it would seem like I'm getting an Index fund, but I just pay more for them in expenses.

I plan on doing more research into these fund choices and my picks over the next several weeks to see if these choices still make sense. I have already done one thing, and rather recklessly I might add. In the B-Share portfolio I traded all of the shares of the worst performer (American Balanced Fund) and traded it all for the best performer in the selected bunch (Capitol Income Builder). A normal investment account would have tax implications for that I believe but retirement accounts don't. I was also afraid of those mysterious charges they talk about, but I think I held them long enough.

But that ought to be enough for tonight.



Anonymous Mrs. Micah said...

One note on bonds. Many people say that while the younger fold shouldn't have them as a major part of their portfolios, a good 10% in a bond fund isn't a bad idea. Even for young people. As you get older, of course, you increase the bonds.

6:17 AM  
Blogger Swamproot said...

You are probably most certainly correct. :-)

But keep in mind this is in the context of my limited choices. With maybe the exception of Capital World Bd A (CWBFX), I just didn't like the returns, especially with the higher expense ratios of the B-share class that I thought I had to buy making them even less attractive. Also, I was looking at it through 2002 goggles.

Especially when you add a front-end load (and possibly a commission, grrrr) to it (although they do have lower loads than the regular funds).

But to tell the truth, I really don't know much about bonds in general, except you don't want to bother with those EE things you get from the government. :-)

They should probably be something I need to read up on though. Then when I make it to baby step three, I can be prepared to find something appropriate.

I might even consider one of those targeted funds, which decrease their risk over time to a specific date. Those weren't available to us 5 years ago. And given our plan administrator we still might not, but that's another story.

Shoot, I'm just now finding out the effects of the front end load after 5 years! I haven't even began thinking about Tax Efficiency yet.

9:44 AM  
Anonymous Kyle said...

Good rule of thumb on diversification I use: take 120 and subtract your age, for me that is 120-33=87. So I should be 87% in stocks, and 13% in bonds. My 2 cents.

4:01 PM  
Blogger Swamproot said...

Well, I certainly appreciate both of them. :-)

I'm just starting to get serious about my personal finances and can use all the good advice that I can.

4:33 PM  

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