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No-loads should outperform load funds by fee amount
Q. When reviewing the chart of the 15 largest stock funds, I noticed that seven charged a sales fee and eight did not. The average five-year cumulative return was 36 percent for the no-load funds and 60 percent for the load funds. Isn't this interesting that funds that charge a sales fee performed better than those that do not? What do you say to that?
A. I say the sample you looked at was too small to draw any sweeping conclusions.
Your question made me curious about the long-term results for funds with a sales charge, or "load," and those without one. To probe a little deeper, I turned to mutual fund researcher Morningstar, which ran the numbers on 7,870 U.S. stock funds' performance through the end of April. Over five years, the annualized performance was 7.42 percent for load funds and 8.85 percent for no-loads. Over 10 years, it was 10.51 percent for load funds and 11.55 percent for no-loads.
For the entire universe of 14,067 funds, Morningstar said the five-year result was 5.59 percent for load funds and 6.8 percent for no-loads. Over 10 years, it was 7.92 percent for load funds and 8.9 percent for no-loads.
The numbers were no surprise because logically, over long periods of time, no-loads should outperform load funds by the amount of the load.
Of course, financial advisers who are providing good service and helpful advice deserve to be compensated. Paying a load is one way to do that. Just don't count on it buying better performance.
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Q. I have noticed that occasionally above the Dow Jones numbers on television there will be a heading "Curbs in." What does this mean? I've seen it happen when trading volume is high and the market is rapidly increasing so I presume it has to do with a restriction on trading.
A. You presume correctly. A sharp rise or fall in Dow Jones Industrial Average triggers trading restrictions on the New York Stock Exchange. Their purpose is to reduce market volatility.
The most common curb is a "collar," which prohibits certain types of institutional trades when the Dow rises or falls about 2 percent. The point movement required to trigger the collar changes each quarter, but currently it is 210 points.
Less common are trading halts. Currently, a 1,050-point drop triggers a 30-minute or a one-hour halt, depending on the time of day it occurs. A 2,100-point drop triggers a one- or two-hour halt, while a 3,150-point drop closes the markets for the day.
More details are available on the New York Stock Exchange Web site (www.nyse.com). Although it is the New York Stock Exchange that orders a trading halt, Nasdaq trading also stops in the United States when the order is given.
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Q. In the 1960s and 1970s, I purchased a lot of savings bonds that are reaching final maturity. I have changed some of them to HH bonds and plan to change the rest before the end of the year. I plan to submit them to the IRS to take their portion and send me a check for the balance. I do not want to tie them with my regular 1040 yearly tax form. Is this possible?
A. No. The main reason to exchange E or EE savings bonds for HH bonds is that an exchange allows you to continue to defer taxes on the original bonds. That means no tax will be due until the HH bonds are cashed or reach final maturity after 20 years.
If you decide to cash part of your savings bonds rather than exchange them, do not mail them off to the IRS. The proper procedure is to cash your bonds at the bank and report the taxable income on your tax return. The IRS will not make an exception to its reporting requirements just because you don't want to report the income on your return.
HH bonds currently pay 4 percent annual interest and are sold in multiples of $500.
Online Money Map
Investors in Nasdaq stocks have learned some painful lessons in the past two years, including the importance of keeping a close eye on the stocks you own or are thinking about buying. Here's one site that help with that task: the Nasdaq Trader, a source of information on new issues, trading halts and statistics.
-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
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