Investing Fail: American Funds

In the Summer of 2009 I graduated from college and started work as an engineer in the Boston area. I lived WELL below my means, living in a 400 sqft room, biking to work, taking advantage of free food left in the common areas and almost always eating at home. All this meant I was able to pay off my college debt around September 2009, and the joy I had from being debt free made me want to have my money work hard for me now.

Determined to Invest

Making up your mind to invest is a tough paradigm shift when you view your life in the present moment. Understanding your WHY, and then consistently moving money from your bank account to your brokerage account, initially, can be hard, but having a purpose will help you make investing easier. When I first started investing with American Funds (AF) I was generally happy. I saw modest growth and gain and began seeing my money grow for me. After paying so much to my college debt every month, investing was a lot simpler for me because I didn’t see the pain of having money leave me every month. Instead of money going from my pocket to the debt, it was being invested in my future. I started investing about one-thousand dollars a month during the first year of my career in a taxable American Funds account (I clearly missed the benefits presentation from my company that stated they matched contributions in my 401k, more on that in another post).

Win-Win, right ?

So I put money with AF each month and my money grows… win-win right? That answer depends on who you’re rooting for. What I now realize is that, not only did I pay a fee to buy into these funds (a load), but I’m paying a small fortune on the fees or “expense ratios” these funds are charging me. I use Personal Capital to analyze all of my accounts, and they have some pretty awesome Advisor Tools, one such tool is the Fee Analyzer. The results are shocking!

PC_AF_Fees

 

 

4 YEARS OF RETIREMENT LOST TO FEES!!!

Let’s break it down. The average annual fees for the AF account are 1.38%, that doesn’t actually sound too bad right ? I mean the IRS can take anywhere between 10 and almost 40% of your pay, why does 1.38% matter so much. Well, think about year over year, every year 1.38% of the balance of my funds is paid towards the management of the funds, 12b-1 fees and other expenses. That means that these funds have to outperform, for example, a total stock market index fund (like VTSMX, SWTSX, or FSTMX) by roughly 1.3% to actually validate their existence. So….do they ? (hint: the answer is no). But the even more shocking conclusion is that investing in these funds would shave 4 years off of my retirement and drop my earnings by 34%! That’s huge! 4 years is a long time to have to work just because I chose the wrong funds…lesson learned.

Further proof

Case Study: Are my AF funds beating an index ?

Let’s take one example of the funds I, unfortunately, currently own: AMFCX versus the S&P 500 (SPYZ)

UntitledLooking from the past three to twenty years the AMFCX has been constantly under-performing the S&P 500 Index. So, not only are they under-performing the index consistently but they are charging me 1.38% annually to do it!

So What Now ?

After I learned the high cost of under-performing funds and greedy fund managers, I found out about Vanguard and low cost index funds. That’s how I invest now and how I will continue to invest in the future. I have already cashed out two funds from my AF portfolio and invested them in low cost index funds at Vanguard. Because of my tax bracket situation in 2016, I am going to wait until next year to move the rest of my AF funds over to Vanguard.

High fees or “expense ratios” are burning holes in people’s retirement, I hope you take this to heart and make the switch before your high fee funds start draining your retirement before it’s too late!

 

What are you invested in? Have you taken a look at the fees of your retirement accounts ? Do you invest yourself or have someone else do it for you ?

 

 

5 comments

  • David –

    I love personal capital, such a great website, especially the retirement fee analyzer. Based on a previous post, I’m guessing you got steered by Dave Ramsey into the American Funds. It baffles me why Dave continues to give advice for American Funds over Vanguard.

    • Indeed MSM! I used one of his ELPs and they used American Funds. I sincerely wish I could have gotten better advice back in 2009 when I started investing. With the amount of growth of the stock market since then and the amount of fees I could saved/re-invested I’m sure my portfolio would have been 2 – 3% higher! Are you all completely invested with Vanguard’s funds ?

  • This is all over my head David. I think I need some 1 on 1 instruction, please & thank you. 😊

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