One of those investment counselors says, I will take your money and make you a profit every year, but I have a very hefty fee. For every dollar I make you I will charge you a dollar.

How much will you make for me?

He replies, Because I invest in the stock market I am not sure what each year will be, but I have a real time track record that I have doubled my clients money every three years. If you start with $10,000 you should have $20,000 three years from now.

In other words out of the $20,000 you make with my money you get half? That seems like an awful lot.

Mr. Money Manager asks, Does it make any difference how much I make if I can double your money?

Here we are computing a 50% expense ratio. Who cares as long as he doubles the money? When you talk to brokers when buying mutual funds one of their pet talking points is that a particular fund has a very low expense ratio. Who cares? The only thing that is important is the final return.

Does it make any difference if a fund has a 3.5% expense ratio or a 1% expense ratio if the 3% fund makes more money? Of course not.

This is part of the Wall Street mystique designed to confuse clients. Whatever mutual fund you choose it should be one that has the highest return. When it is no longer going up it should be switched to a better performing fund that is why you should only buy no-load funds. Full service brokerage companies do not want to sell no-load funds.

Commissions are expenses, but brokers dont talk about that. Do NOT pay commission. Brokers will tell you that load (commission) funds are better than no-load funds. Not true. Get up and walk away from that broker. He is lying. Be careful of certain types of mutual funds that will have several classes of the same fund some of which have hidden commissions. Dont be afraid to ask. To be absolutely sure call the mutual fund company. They all have toll free numbers.

There is only one way to make sense out of expenses and expense ratios and that is the performance of the fund in relation to all other funds. First eliminate commissions. All other expenses are apportioned over the year. One other nasty charge funds have started adding is redemption fees. Most are 2% and run out for long periods of time. These are added to discourage selling; no other reason.

There is only one thing that distinguishes a good fund from any other. It is going up while the investor owns it. If it doesnt you should not have it. When it starts down it should be sold and this has nothing to do with expense ratios.

There is only one reason to own any equity and it has nothing to do with expenses. It must go up.

Copyright 2006

Al Thomas

Albert W. Thomas has spent most of his life in the field of finance. In 1965 he founded an insurance holding company, Security Dynamics Investment Corporation, after having been an agent and General Agent for several life insurance companies. In 1970 he became cofounder and president of Real Life Estate, Inc., that marketed a unique real estate and life insurance package.

After he became interested in commodities he bought a seat for his personal trading on the Chicago Open Board of Trade, which is now known as the MidAmerica Commodity Exchange. Later he became a full time trader and also acted as a commodity broker for a few select clients. By fellow floor traders Al is considered to be an excellent technical analyst much of which is outlined in his book IF IT DOESN'T GO UP, DON'T BUY IT! It became a best seller on Amazon.

In 1981 he sold his membership on the Exchange and with his wife, Carolyn, lived full time aboard their 41' ketch, the Aumakua (which means guardian angel in Hawaiian). They sailed in Florida and the Bahamas for two years.

He founded World Trading Group in 1984 that grew to the seventh largest introducing commodity brokerage firm in the U.S. with 35 offices from coast to coast, Alaska and Canada. It was sold in 1992.

Al is a graduate of Northwestern University with a B.S. degree in Commerce and is a member of MENSA. He is now president of Williamsburg Investment Company that syndicates his weekly financial column since 1999 to more than 300 newspapers and writes a financial market letter called Over My Shoulder that is quoted in Barron’s and many other publications. A 3-month trial subscription is available on his web site. He is a regular guest on several financial radio talk shows.

His favorite pastime is fishing.

Mr. Thomas is available for speaking engagements. Please call 321-453-5300 for more information.