Podcast Episode - Suze School: Don't Get Stuck With A Heavy Load

ETFs, Investing, Mutual Funds, Taxes

December 12, 2021

Listen to Podcast Episode:

On this episode, we go to Suze School for a lesson on the importance of having a diversified portfolio and why you should never buy a loaded mutual fund.

Podcast Transcript:

December 12, 2021. Yes I know I still have a sinus infection in a cold. What am I going to do? What I'm going to do is this, I'm going to try to do this podcast because it's in this podcast that I have so many things that I need you to know. I need you to know about what to do at the end of this year. I need you to know how to view these markets. I need you to not have financial regrets because you've made investments and you don't even have a clue what you've invested in because some financial advisor just told you to do it and you did it. So let's start with the markets, the overall markets, You know it was on November 26 when the market went down that 905 points that day. And on November 28 when I did the podcast I said to all of you just let's wait. Just let's see what happens on Monday, don't do anything, don't get crazy here, just let's wait. And what's interesting is that proved out, once again, if you wait and you sometimes do nothing but observe and don't get freaked out because of these moves in the market, in the long run, you come off far better. I'll give you an example. All of you maybe you went to sleep the night of November 25. You were looking at the DOW Jones industrial average which is mainly what you see on television all the time. An index that follows just 30 stocks and it was doing great, it was at 35,804 And you probably were looking at your 401K accounts and your Roth IRAs and everything that you have and you're feeling pretty good And then came Friday November 26. The market plummets. Although it seems like it did cause 905 point seems like a lot And it closed at 34,899. Then the very next day's on Monday Tuesday it started to go up. And then it went down again and kind of hit its low right on December 1st and then it started to go up again and all around. But let's just look at where we are right now. So on December 10, December 10, just nine trading days later from November 26, The Dow Jones closed last Friday at 35,970, that's 166 points higher than what it closed on November 25. So the markets go up the markets go down, the markets go up, the markets go down, and that kind of shows you that you can never time the market. Maybe you sold the day that it went down 905 points and you just felt so great about it because you knew it was going to continue to go down and you were just going to wait to everything got cheaper and whatever it may be and then the overall markets go up again And the same thing happened with the Standard and Poor's 500 index. Which is an index that covers 500 of large cap stocks and many of you follow that. But what's interesting is that even though the indexes the overall index is that had huge diversification in them. They're fine. But yet many of the individual stocks That many of you purchased are down more than 50% from their year high. And a lot of you are freaked out. Recently I got an email from somebody that said Suze Suze here are the stocks that I own and they're good stocks. I like these stocks. I'm diversified but they're going down and down and down. And I looked at all of the stocks that this person had and while he was diversified in companies, he had maybe 30 or 50 different stocks of different companies. Every one of those companies was in the technology area and they got crushed and they're still getting crushed. So when I talk to you about diversification, I'm not talking to you about owning 25 or 30 stocks, which is actually the minimum that you should own. If you decide to buy individual stocks versus a mutual fund or an exchange traded fund. It's not just that you're diversified with 20, 25, 30 stocks, it's are you diversified in the areas those stocks happen to be invested in because if you are all in biotechnology, you're not diversified. If you are all in technology, you are not diversified. If you are all in oil, you're not diversified. You want stocks that are totally diversified in terms of the area that they are investing in. The reason why I have told all of you over all these years for now anyway. You never know when this will change but that if you simply want to invest, just dollar cost average or by the Vanguard Total Stock Market index fund or ETF. I like exchange traded funds better than mutual funds. But that's just my preference. Either one is fine as long as it's a no load fund and I'll talk about that in a minute here. The reason I always wanted you to buy either Vanguard Total Stock Market Index fund ETF. Or the Standard and Poor's 500 index fund symbol SPY. That's their ETF. Or even the Vanguard standard and Poor's index ETF, symbol VOO. Is because it is diversified and because it is diversified, here's what would have happened to you if you had invested in those two ETFs. So just let's even look at the year high of the Vanguard Total Stock Market index ETF, VTI, the high was $243 a share this year. Highest it's ever been Friday. It closed at $239, hardly any loss there whatsoever. The VOO. Which again is the Standard and Poor's 500 Vanguard Index fund. High of the year was 435. It closed on Friday at 432. And both of those pay you a dividend. Like VOO pays you a dividend of 1.34%. right now. VTI The vanguard total stock market index ETF pays you a dividend of about 1.19%. But yeah a lot of you just think oh the way to invest is I'm going to buy Robinhood, I'm gonna buy this. I'm going to no you all have to slow down and ask yourself the question am I diversified and you need to look at your portfolio, at the stocks that you own or the mutual funds that you have and really look at the stocks that they own. How are you doing and how is your money really invested? Because most of you don't have a clue. Last week. Again I got an email from a friend who I haven't heard from in years and this woman is now in her 60s and I've known her for 20 or 30 years. When I say this woman is smart, efficient and helps many of the executive officers of these major corporations keep their lives together and as she is just so incredible. I can't even tell you. So she writes me and she asked me if I can simply look over everything that she has in her IRA. And I say sure send it to me she sends it to me and when I say I wanted to throw up that's putting it mildly. And I wanted to throw up you know if KT was here she would say Suze do not say that don't talk like that that's not nice. But that's how I felt everybody. But you know and I felt that way because when I looked at the mutual funds that she had. Number one, they were all loaded mutual funds. Now if you have been listening to me for the past 30 years you would know that I have been saying over and over again like I'm like a little wind up ever ready battery that just keeps doing the same thing over again. Saying do not buy loaded mutual funds. Do not buy loaded mutual funds, do not buy loaded mutual funds. And I wrote her back and I said well obviously you haven't listened to me much over all of this time. You haven't read any of my books. You haven't listened to the TV Show. You aren't listening to the Women and Money podcast. And I thought you were smart. Well obviously she said all right what do I need to find out? I said these are the questions that I want you to ask your advisor blah blah blah blah. And it came back with everything that I had feared. So I want to go to Suze school right now because I want you to understand in case you don't, the difference between a loaded mutual fund and a no loaded mutual fund. Because there is a huge difference. You need to know what your funds are costing you to purchase number one, and what is the expense ratio within the mutual fund that you own. And an expense ratio is an amount of money, a percent of your return, that gets paid to the portfolio manager who is managing your money for you. So let's just first start with these mutual funds that my friend bought. Her load on all these mutual funds that got paid to the financial advisor was 5.5%. What that means is this. Let's just say this woman had sent in $10,000 to her account and she wanted to invest it in the mutual fund that the advisor was recommending. You would hope that all $10,000 would go to work for her, but because it is a loaded mutual fun with a 5.5% load, $550 came off of her money and went directly to the advisor for selling her that fund. What that means is that she had only $9,450 that was going to be invested for her. So that fund would have to go up 5.5% in value just for her to break even. Now one has to ask themselves, what is the role of the advisor? What does the adviser have to do with the performance of the mutual fund that this advisor suggested that my friend put her money in? And the answer to that question is absolutely nothing. Nothing. It's just like when you buy a car you go in and you purchase a car from a salesperson. The question is what does the salesperson have to do with the performance of that car? And the answer to that question is absolutely nothing. They just get a commission for selling you the car now you've purchased the car and every time it breaks down, the salesperson isn't the one who fixes it. You then take it in and you have a mechanic that fixes it, charges you, and that is an expense to you. It is an expense above what you paid, not only for the car, but to the salesperson as well. Are you all following me? With a mutual fund that has a load, so the salesperson got paid a commission of 5.5% just to sell my friend this fund. When I looked at these funds, the portfolio manager, the one who decides do they sell, do they buy, what do they do. They're the ones who are fixing everything in this portfolio like the mechanic with your car, they were paid 1.2% expense ratio. What does that mean? That means if this fund happened to earn 10% this year, 1.2% of that would be subtracted so that all my friend would actually earn would be a return of 8.8% on her money. Because 1.2% went to the portfolio manager. How many times have I also said to you, you don't ever want to pay a high expense ratio in a mutual fund. That I want you to buy mutual funds or exchange traded funds where the expense ratio is like 0.03%, hardly anything. When I did an actual study for my friend of the time that she has invested with this advisor until now, it literally has cost her over $20,000 if she simply had taken this money and put it in where the mutual funds are or the exchange traded funds I've been asking all of you to invest in. So because she just did what was easy, handed this money over to somebody and didn't ask the right questions, it has cost her a whole lot of money because she didn't give them that much money to begin with. Thank God. So my advice to my friend is this, do a transfer to either Fidelity, TD Ameritrade, Charles Schwab, and let's start over. I want you out of all the mutual funds that you're in because they're all charging you way too high of an expense ratio and I don't care that you already paid the load to be in there. I don't like these funds. So what is a no load fund like? What would her alternative have been, and this is what the difference is between a loaded fund and a no loaded fund. She very easily could have bought Vanguard mutual funds that are all know loaded. Which means if she had invested $10,000 today, $10,000 would go to work for her. If in fact she had invested $10,000 today and the markets did absolutely nothing and tomorrow she wanted to take her money out, she would get all $10,000 back. In a loaded fund, if she invested $10,000 today the markets did nothing, they stayed stable and she wanted to take her money out tomorrow she would only get back $9,450. Do you understand the difference between a loaded mutual fund and a no loaded mutual fund? There is a tremendous difference. How do you know if you have a loaded mutual fund? If you have a loaded mutual fund there will be the letter A after the fund that you own. An a always means it's a loaded fund, that the load is taken out immediately. Years after no load funds started to emerge, because when mutual funds first started all you could buy was a loaded mutual fund, like I remember when I first started there were maybe what 300 mutual funds if that that you could buy, and as mutual funds started to catch on, no load funds started to emerge, when no load funds started to emerge, the companies selling loaded funds went oh we can make everybody think that if they invest they’re not paying a load even though they will. So they came up with what's called B Share funds and you would know if you have a B share fund, if the letter B is after the name of the mutual fund that you own. And a B Share fund is simply this, you invest $10,000 today. And absolutely true. They do not subtract any fee from your money for the advisor who sold you that fund. But the advisor is still paid let's just say 5.5% commission for having sold you that fund. The conditions of a B share fund is that you have got to stay in that fund for at least 5-7 years. So that there is time for the company that paid the advisor to get their money back. Got that everybody, how do they do that? They do that by charging you a surrender fee. If you come out of that mutual fund before five or seven years there will be usually a 5 or 7% surrender charge. The first year, maybe the second year, maybe then it goes down to 4%, 3%, 2%, 1%. And then after five or seven years you can then come out without any charge whatsoever. But all those years they are subtracting from your return 1- 1.5% to get their money back. So again, if you have a B Share Fund and your fund makes 10% that year, you would have a fee of possibly 1.2% or more subtracted from that return. So all you would get is 8.8% in this example. And that is how they get their money back. So you are paying it whether you know it or not. I really thought that everybody at this point in time would know the difference between loaded mutual funds and no loaded mutual funds. B share funds and no loaded funds, and obviously you don't. So I want all of you to look at your statements, and if you own mutual funds, I want you to know what kind of mutual funds do you own. What is the expense ratio that you are currently paying? Because as time goes on, we've had a wonderful run these past years. Fabulous. You know, it's been really unbelievable if you think about it. But it's not always going to be that way. 2022 might be a little bit more difficult of a year. Let's see what the Feds do to curtail inflation and what they do with interest rates and what that has to do you know with the stock market. So you cannot afford to be paying 1.2% of your return to somebody. You can't afford to be paying 5.5% simply to invest in something when there are equally, if not better, alternatives that absolutely cost you hardly anything. Fidelity, for instance, they have mutual funds that have no expense ratio whatsoever. So you might want to be looking at these things. Again, the exchange traded funds that I like, their expense ratio is 0.03% 0.08%. Okay. I don’t have a problem with that. The portfolio manager who's managing this, they should make money. I don't have a problem with that. But they shouldn't, gouge you, they shouldn't be charging you so much that they're making money even when you're losing money. I don't think so. So it's really important that you understand this Suze school and that you listen to it again and again and again. Do you hear me now? We are entering the very last two weeks approximately of this year. And I myself went through my portfolio. Now as you can imagine I actually don't own any mutual funds or exchange traded funds. I only own individual stocks, and I own a lot of them. However, not all of them have made me money. Some of them have gone down considerably, considerably, especially from their high. And sometimes they have gone down from where I purchased them and I have losses. I also have many stocks that I did sell and I took gains. So I will owe taxes on those gains. So when I look at my stock portfolio and I see that I have stocks that I have losses on and I see that I am going to owe a lot of money in income tax. Then I make decisions. Do I want to sell those stocks and take a loss to offset some of my gains? And I did that in many of the stocks that I had losses in. All right, I rather pay less in taxes than possibly hold onto something that I'm not sure they're going to come back right away now if they don't come back within 30 days, I can buy them again. And I still was able to take off their loss. If they start to go up dramatically in 30 days, I can make a decision. Do I want to buy them back or do I just want to go a whole different way. But for those of you who do have gains in your portfolio and you've taken them, there's a difference between unrealized gains and realized gains. Unrealized gains are when you look at your statement and you see how much money you've made, but you still own the stocks, you have not realized those gains. But they're on paper. The truth is they don't do you any good till you sell them people because it can go from having gains to having losses. But those are known as unrealized gains. Then when you look at your statement, you'll see that there are realized gains, stocks that you have sold that you have realized the gains. You should also see stocks that you've sold, that you have realized losses. You'll also see stocks that you have unrealized losses. And you should look at all of that and make a decision based on your tax bracket. Is this the time before the end of the year that you want to realize some of your losses and offset your losses against some of the gains that you have realized. If you have gains that are unrealized, I probably wouldn't touch them here right now. All right. Your stocks are good. Things are good. Hopefully. All right. Just keep them. But if you have realized gains where you have sold your stocks this year and you are going to have a tax ramification because of that. Look at the stocks that you have losses on right now and see if you want to offset those too. So this was your Suze School and I'm just going to summarize here. You have got to be diversified. Again, when I say diversified. It's not just owning many stocks. It's owning at least 20-25 or 30 stocks in different areas. Their focus is different. Home Depot is very, very different than Airbnb. It's just you have to know the difference between the stocks and what they do. So diversification is key. Again, if you're going to invest in mutual funds, you are to never, ever, ever in my opinion, to buy a loaded mutual fund. If you want a mutual fund, fine make sure that it is a no load fund, one that does not cost you anything to buy. Another thing about mutual funds and I'm just going to say this here because I forgot to, is that maybe you have four or five mutual funds and you think you're diversified? Well maybe those four or five mutual funds all own the exact same stocks. So you better check to see what are the top 10 holdings of every single mutual fund that you have. And it's easy to find this. Everybody, just go to Yahoo Finance or type in the symbol of what you own and up will come the information that you need. Got that? Again, you never want to pay more than really .50% of an expense ratio for a mutual fund that you may buy. You don't want to do that. And last, but not least. Look at all your statements and look at should you do tax loss selling right here and right now before the end of this year. So there's your Suze school for December 12th 2021. Until Thursday there's really only one thing really one thing that I want for each and every one of you. may you all stay safe, that you all stay strong, and may you all be secure. So until Thursday you take care, bye bye now.

Suze Recommends

Saving, Investing

There is Still So Much to be Thankful For

Read Now

Credit & Debt, Saving, Investing, Retirement

Amazon Freevee Brings Back The Suze Orman Show With an Exclusive Licensing Deal

Read Now

Saving, Investing, Retirement

Podcast Episode - Suze School: How To Calculate Your Roth IRA Contributions for 2023

Read Now