Reader Question: Cutting Investment Losses

by Kevin on March 31, 2009

This past weekend reader April e-mailed me with a question (I love when my readers do this!):

Read your blog re: Franklin Templeton front loads / expense ratios and it confirmed what I’ve been trying to ignore for a while.

The good news is, I’ve decided to move away from Franklin Templeton and invest in Vanguard like so many people have told me to do, but my question is this–
How to move away from an unsatisfactory investment(s), or cut my losses?

Right now I’ve got about $5K in a Roth IRA Target Retirement fund at Franklin Templeton, and about $5K in TEPLX (Franklin Templeton Growth A) growth fund.

It doesn’t seem like a good idea to put more money into either of these investments — should I “exchange” my TEPLX shares for more Target shares, and just let the Roth sit until retirement?  Or considering the relatively small amount of money and my age (22), does it make sense to cash out the TEPLX shares and put the money in Vanguard?

For starters let me point you toward the articles she read:

April, to start off with I want to say congratulations. You’re 22 years young and you’ve got $10,000 or so socked away in investments already. That’s awesome and you deserve a pat on the back for it. If you’re able to keep this level of investing up you will have no problem retiring comfortably.

Your investments as you mentioned them:

  • $5,000 in a Target Retirement fund in a Roth IRA with Franklin Templeton
  • $5,000 in TEPLX

You didn’t mention which Target Retirement fund you are using so I am going to base my assessment off of Franklin Templeton 2045 (expense ratio of 1.54%). TEPLX has a front-load of 5.75% and an expense ratio of 1.03%. Ouch!

Investment Decisions Should Be Based on Your Situation

I always like to put this blanket statement out there when I work with individuals on these type of questions. I don’t have a magic answer that is universal and applies to every situation. I’m also not a financial expert. Keep your own situation in mind.

April should be asking herself where she needs to be in terms of an emergency fund, if she has any outstanding consumer debt to pay off, and be aware of any other saving or debt goals. She can’t make a truly informed decision until she is aware of all of these.

From the limited amount of information I have I would recommend selling off both sets of shares completely and running into the safe, loving, low-fee arms of Vanguard.

Here’s why:

Franklin Templeton is getting rich off of you. The front-load of 5.75% on the TEPLX fund is nuts and will cost you thousands upon thousands of dollars in retirement. Every dollar you put into the investment will automatically be cut down by 5.75 cents. Another way to look at it is you would need to put in $1.06 in investment money just to get $1 of investment (math = $1/(1-0.0575).

This will hinder your portfolio growth significantly over time while making the firm rich. And the 1.03% expense ratio is slightly above the average of all funds and significantly higher than an index fund (which would be in the 0.1% to 0.4% range generally). Switching to a cheaper fund could easily save you half of a percent.

The Target Retirement fund isn’t inexpensive either. The expense ratio is 1.54%. Compare to Vanguard’s Target Retirement 2050 (VFIFX) with an expense ratio of 0.19%. That’s a huge difference — 1.35%! So what Franklin Templeton is telling you is they can outperform the index (or comparable fund) by that much every single year.

(By the way, that’s impossible.)

Run the math on what you would save.

I’m going to assume you switch both funds to Vanguard’s Target Retirement 2050 with the 0.19% expense ratio.

If you held your money for 41 years in the following funds, this is what the worth would be at age 63:

  • $5,000 in Franklin Templeton TEPLX (1.03% expense ratio): $55,493
  • $5,000 in Franklin Templeton TR 2045 (1.54% expense ratio): $44,668
  • $10,000 in Vanguard Target Retirement 2050 (0.19% expense ratio): $158,281

Combine the two FT fund amounts together and you have $100,161. That’s $58,120 less than Vanguard (or 36.7% less).

Be Aware of Fees

I do caution April to be aware of any fees or penalties she may get hit with for cashing in her funds early. Some mutual funds have a 30, 60, 120, or 180 day waiting period you must wait or you sacrifice a percentage of what you’ve put in. She’ll need to check that before selling all of her shares and going to Vanguard.

At the end of the day April has a long time until retirement. I would get out of the funds as quickly as possible — while avoiding fees — and into a less expensive investment that tracks an index. Thanks for writing in, April!

(Have a question? Contact me!)

{ 1 comment }

Belinda Gendle September 10, 2009 at 10:30 pm

I was considering putting a good sum of money into Franklin Templeton income fund. I have read the brochure given to me by a bank employee who has expertise in investments. After reading the above comments on Franklin Templeton’s fees, I’m not sure if I should go this route. I am 50 years old and have a business. I have my funds in a low interest money market 1.70 percent. How can I invest my money wisely for the future.
We have equity in our home as we purchased in 1996. Stocks seem so risky. Can you give me any advise in this matter.
Thank you

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