The Pros & Cons of Sub-accounts and No-loads

[Guest kathye]

I know that all the advisors say go with no-load funds verses loaded funds and the importance of being diversified but all the mutual funds minimum requirements are $1000, so it would take several thousand dollars to get started into 3 or more funds. What's a person to do when you don't have several thousand $$$? I was thinking about investing through my Ins. agent that offers sub-accounts through American Funds. She even helped me select 3 funds with only $300 to start followed by monthly DCA to be divided equally among the funds. I backed out after finding out about the 5.75% front-end load. Needless to say, the sales person was my daughter-in-law. My husband has a 401K and is pretty much diversified but we're wondering where to fund a Roth IRA into one fund since we're not going with the sub-acounts offered though the Ins. Co. The

only good from this is being able to diversify into 3 or more different funds each month for the price of one. What I want to know is are there any no-load mutual funds out there that one could purchase into three different funds for $1000 like the Ins. sub-accounts?

[Bird]

I wouldn't be obsessed with diversifying $1,000. Keep in mind that a mutual fund is diversified to start with by its nature.

I'd pick a good fund family, and then one fund in the family, maybe an equity-income or balanced fund, accumulate the $3,000 and then split it up. When you look at the actual $$$s to be gained or lost through diversification among funds it's not going to make much difference.

If you're comfortable doing your own thing, go with a no-load family.

If you need hand-holding, you could do a lot worse than the American Funds. I'm a little confused because you mention sub-accounts which implies a variable annuity contract, and you also mention a front-end load which is not generally how VAs are sold...but now I think I do remember seeing that as an offering. But in any event I wouldn't recommend using a VA because it typically adds a layer of expense and nothing else. You could simply set up a Roth IRA account through American Funds without the ins co middleman.

[John G]

Some clarifications:

First, Bird is completely correct about diversification. While you can get narrowly cast single industry (often called sector funds) or just large or small size firms (often referred to as the "cap" as in capitalization or the total value of all shares) or just dividend or just growth.... even these have some element of diversification. Shifting to a general stock fund or something like an S&P500 index fund... here you have a tremendous amount of diversification. Just because you may have three mutual funds does not mean you are significantly more diversified because of the substantial overlap of holdings!

Second, $1000 does not need to be diversified. This is a modest amount - for some people, just one weeks salary.

Initial contributions to Roths can be a hurtle for some folks starting up, especially for folks who have just entered the work force. Some mutual funds have a lower or no initial amount if you sign up for a regular automatic contribution from the checking account. Another option is to set aside the amount you can invest and add to it and when you exceed the initial contribution - then open the account.

Why NO LOADS - because they perform well and you don't lose a chunk of your funds to commissions, and you can readily change investments. Making a mutual fund selection does not require a PhD in mathematics or business. Almost any general purpose, broadly diversified stock equity NO LOAD fund will work. The Vanguard S&P500 is a classic choice because of the low annual expenses.... but ther are literally hundreds of good choices. You can find many covered in financial mags. Consumer Reports each March looks over the field and highlights about 100 good funds and explains the basics with layperson language.

I am not sure where you got the "three mutual fund" information. Some folks are very happy with just 1. I remember reviewing the records of one person who had 30+ funds and did not know much about any of them. For the next few years you will be OK with just one fund. Keep it simple. When you accumulate 50% of a years salary in the first fund, consider choosing a second fund.

What most concerns me is that you have a daughter-in-law but are apparently just getting started with retirement investing. Don't worry about the number of funds, focus on getting more money invested.

[GBurns]

Do not get hung up on the term No-load, as the SEC and others keep trying to point out that:

A Word About "No-Load" Funds

Some funds call themselves "no-load." As the name implies, this means that the fund does not charge any type of sales load. But, as discussed above, not every type of shareholder fee is a "sales load." A no-load fund may charge fees that are not sales loads, such as purchase fees, redemption fees, exchange fees, and account fees. No-load funds will also have operating expenses.

In other words no-load does not mean low fees or low expenses and vice versa:

"Be sure to review carefully the fee tables of any funds you're considering, including no-load funds. Even small differences in fees can translate into large differences in returns over time."

I suggest that you do some research so as to better understand the issues. A good place to start is:

http://www.sec.gov/investor/pubs/inwsmf.htm

http://www.sec.gov/investor/pubs/mfperform.htm

Heed the warnings posted and stay away from Variable Annuities and middlemen. Also stay away from salesmen who cannot or will not explain so that you can understand or who try to sell you on the basis of how much commission they make. If you use an advisor make sure it is someone who sells you that which is best for you and not just what they have to sell.

Having more than 1 mutual fund would likely not be diversification of your investment portfolio and any advisor worth their salt should know that.

[Guest kathye]

Thanks for your replies. I am aware of all that was mentioned but I found myself somewhat sidetracked of info., I've been asking and receiving on a website about fund investing. I'll not mention that site here. Some was good advice and some was... well, made one think investors needed several funds to have a properly diversified portfolio. A article on "superionr diversification on a shoestring budget" suggested to keep expenses low and efficiency high, they suggest investing in a single asset class, represented by one fund, each year for nine years. That's nine different funds! A more logical approach was for one that must have only one fund would be one with low costs, low turnover, and a portfolio run by some of the best managers in the business, such as Vanguard Wellington with its very low expense ration of 0.36%. Now that's more along my line. Just as you guys mentioned, I only need one good fund, not nine to be properly diversified. I was also recommended that since my husbands 401K portfolio is 84% in US equities and 16% international that for our portfolio together to be properly diversified that I should put all my IRA contributions into an international fund. I was skeptical of investing 50% in international funds like they suggest. I have read lots of material on investing lately plus several books and all was plain and simple but for the pass several weeks these articles have thrown me for a loop. To John, yes I plan to keep it simple. You might say that I am just getting started at 50! I have been through a divorce several years ago and lost alot including my savings. Ofcourse that has meant starting all over for me again. I'm remarried to a man that is receiving military retirement after 24 yrs. and has a second job now with a 401K. So you might say, he is MY retirement investing and he has me in charge of all the finances plus making his investment selection in his 401K. I do have quite a bit in a IRA plus some with White Oak Growth that is doing terrible. I consider that choice a mistake. I'm presently not employed but have a BA degree in Natural Health. I am presently keeping my 5 mo. old grandbaby. I became serious about investing about 4 yrs. ago and want to read everything I can pertaining to investing. But it has now been until now that I can finally start to invest through a spousal IRA. I am desperate at this time to make right decisions and have been seeking info. from all sources. I know I worry too much, but from you guys, I know to keep it simple. And to Bird... thanks for the advise, I am knowledgable enough to need no hand holding, just some good advice such as what you gave me. Thanks for those websites, GBurns, I will definitely research those. I love reading the advice that you give on this website.

[Bird]

Kathye-

Thanks for the feeback, and good luck!