Pave a Path to Profits By Watching Costs
Shawn Splane, a radio talk show producer at station KIRO in Seattle, is ready for whatever surprises the stock market may throw his way, including lower returns and a possible market downturn in the months ahead.Skip to next paragraph
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Last year, Mr. Splane and his wife weeded out several low-performing mutual fund accounts. The 11 funds he and his wife now hold are all no-load, without up-front sales charges; he shuns unnecessary transactions to avoid fees; and he makes certain that fund-management expenses aren't out of line - no more than 1.5 percent a year for his US equity funds, and only slightly higher for his international funds.
Financial experts say that what the Splanes have done is exactly correct, given uncertainties in the market and the likelihood of lower returns in 1998. Major US financial houses have been taking similar belt-tightening steps, using computers to speed execution of trades and cut transaction costs. If the industry giants are shaving costs to keep profit margins high, then smaller investors should do the same, experts say.
Slashing costs makes special sense now.
Market returns are expected to slow from the torrid pace of the past few years.
"For 1998, we expect that total return [including reinvested dividends as well as capital gains] will be below the historic norm, which has been 10 percent," says Arnold Kaufman, editor of "The Outlook," published by Standard & Poor's.
Corporate profits are expected to be about the same as this year, up about 15 percent for the S&P 500 companies, Mr. Kaufman says. "But it is important to note that this is our current estimate." Forecasts made more than three months before the start of the calendar year "tend to be cut back."
"Dividend growth will trail profit growth" next year, he says. The dividend yield will stay low. At current stock prices, you earn about 1.63 percent annually on the S&P 500, "about the lowest rate in history," Kaufman says. To get the yield up would require that stock prices decline - not a sanguine alternative.
The bottom line, experts agree: Investors should look for ways to bolster returns by cutting costs.
That means looking at commissions when you buy stocks or bonds. And, with mutual funds, it means watching expense ratios (annual management fees as a percentage of assets invested), loads (charges imposed when you buy or sell a fund), and marketing costs - the "12b-1" fees that can be as high as 1 percent of assets each year.
Avoid paying entry loads, unless a load fund is red hot. Splane buys only no-load funds. He reviews each prospectus to avoid funds with 12b-1 fees. And he avoids the switching fees that are often imposed when moving between funds in a family.
Also look for low expense ratios.
Index funds typically have ultra-low expenses, because they simply buy and hold the companies in a market index.
Actively managed funds, by contrast, can have high costs. Consider MFS World Equity B, a global stock fund with strong returns for the past three years (16.8 percent a year). It charges a 4 percent load and ate 2.45 percent of fund assets in expenses in 1996. Lots of global funds have posted worse returns, but those expenses are steep. Janus Worldwide, a global fund up 24 percent for three years, is no-load and charged only 1 percent for expenses in 1996.
Remember, your goal is total return, not just low costs.
When buying individual securities, compare the commissions charged by discount or deep-discount brokers with those of full-service brokerage houses. Discounters, such as Charles Schwab (800-435-4000), Olde (800-872-6533), or Waterhouse Securities (800-825-1090), usually charge far less.
Shop around. If you're buying 200 shares of a stock trading at $25 a share, the commission is $37 at York Securities (800-221-3154), versus $89 at Schwab.