From time to time, people ask me what I think about mutual funds run by American Funds. My answer is that it depends on the circumstances.
In my experience, if you’re considering using American Funds, you’re likely in one of two situations:
- A commission-paid financial advisor is pitching you an American Funds portfolio, or
- American Funds is one of the investment options in your 401(k).
American Funds in your IRA
If somebody is currently attempting to sell you an American Funds portfolio for your IRA or taxable account, I’d suggest politely declining. I’d also suggest finding another advisor — one not paid on commission.
American Funds aren’t the worst thing you could put your money into, but the reality is that there are better, less expensive options available. There’s really no need to pay a sales load or an expense ratio of almost 1% per year.
Expense ratios are an excellent predictor of future performance. In fact, some studies show that they’re the best predictor. In other words, one of the most reliable ways to improve the performance of your portfolio is to reduce the costs you’re paying for your investments. (Makes sense, right?)
High-cost fund companies (and the salespeople pushing their products) will go to great lengths to obscure the common sense importance of costs. Rather than focus on costs, they promote the performance of whichever of their funds have performed best lately — all the while ignoring the fact that past performance is basically worthless as a predictor of long-term future performance.
American Funds in your 401k
While I’d suggest against using American Funds in your IRA or taxable account, it’s actually quite likely that, if American Funds are available in your 401(k), they’re going to be one of your best options.
Why the big difference? Two reasons:
- In a retirement plan at work, you’ll often get access to American Funds products without paying a sales load, and
- It’s likely that the other options in your 401(k) aren’t any better.
My advice for choosing funds in your 401(k) is to determine the asset allocation you want for your portfolio, then research the available investment options to determine the lowest-cost way to implement that asset allocation. For many investors, that will mean using some American Funds products in their 401(k).