The price to invest long term with First Command
The difference in cost between a load and no load fund is a good question. I should have posted a numerical example a while back. Let’s take a look. One of FC’s funds, AIM Summit, which has been sold recently to new FC clients. It has an expense ratio of 0.99%. Summit will have a 50% front end load for the first year.
Now let’s compare Summit to the Vanguard 500 index fund with an expense ratio of 0.18 and no load. We use the Vanguard 500 index comparison since it is a large cap fund as well. I will use 0.2% expense ratio instead of .18% for Vanguard so we can use the software from the link below. We will also need a few other assumptions.
1. Both funds will be made into an IRA (so no taxes at the end)
2. We plan on only contributing $3,000 this year. The full amount will go to the Vanguard fund. You will only get to contribute $1500 to the AIM Summit because of the 50% fee.
3. Every year we will contribute $3000 to both IRAs (I know the contribution goes up the next few years, but lets keep it simple)
4. Lets assume that the SP500 composite index (not to be confused with Vanguard 500 index) will do as well as the stock market average since1926, which is between 10% and 11%. Let say the SP will average 10.5% to be safe. We will make 10.5% our average return for both funds.
5. Assume an inflation rate of 3%
6. We will invest for 40 years.
So what is the result?
AIM Summit will be worth $1,636,109.
The Vanguard 500 index will be worth a whopping $2,024,947.
The difference is $388,838!
The 50% load and higher expense ratio is a high price to pay for investing through FC for the long term and this is only one fund!!
The difference would be greater if we invested more every year and had a higher initial investment! Check out the link below and play with the numbers. You have to do the calculations twice. Once for the non load fund. Then cut that in half and do the calculation for the 50% load fund.
http://www.superstarinvestor.com/ga...orbes.com/tools/calculator/fund_expense.jhtml
But wait, I have one more thing to add. Large Cap Index funds have performed better then 96% of large cap actively managed fund. Summit is an actively managed fund. The chances of beating the market are slim and the chances of Summit beating Vanguard SP500 are close to nil when you factor in expenses. Remember the Vanguard 500 index is not trying to beat the market.
Summit has done worse than the SP composite index an average of 3.45% for the last 10 years. Vanguard 500 index has only done .07% worse on average the last 10 years. You will start with less investment principal with FC and will probably never catch up to someone with the Vanguard 500 index. Remember, it is hard to outperform the market. It will be an uphill battle for Summit as well as other FC funds to beat Vanguard 500. Let us do the calculation again considering how the two funds have done in comparison to the SP 500. This time we will have Summit average 7.12 % a year (10.5-3.45+.07). Our 40 year return for Summit will become $738,675.
Subtract the difference with what you would have made with Vanguard 500 and you would get $1,286,272. That is a very high price to pay for investing long term with first command.
FC’s Summit and Fidelity Destiny have performed worse than the market and their peers. I wonder why FC sold such bad investments?
So the moral of the story is this. You can’t control how the market will do, but you can control costs!
References: John C Bogle: Common Sense on Mutual Funds