American Funds Over View 2024

Should you consider investing in American Funds? What should you know?

There are a lot of active investment managers for investors to choose from. In general Sterling Edge Financial meets a lot of clients looking for an "Upgraded Experience".  An experience and advisor relationship with more compelling engagement, communication, education and understanding of their investments in the context of their life and financial plan.

In general we avoid using American Funds for the majority of our investors.  We see opportunties to create a more meaningful, personalized and detailed investment experiences and strategies backed by academic research.  Strategies that are more compelling from a risk reward prospective, cost prospective (funds that cost less) and tax prospective (funds that generate less tax drag).   

In general, we see American Funds (by Capital Group) as a "Starter" investment experience for retail investors.  A great way to get started if all you have is $100.00.  If you work with Edward Jones broker or other investment brokers, you might be invested exclusively in American Funds.  Typically paying the broker an up front commission of 5.75% (give or take) every time you purchase shares.  The broker receives a trail compensation of 0.25% per year and has no obligation to call you, email you or make sure the investment is still in your best interest. 

Pros:

1. Expert Guidance from American Funds: When you invest directly with American Funds, you tap into the expertise of one of the most reputable investment management firms globally. This direct access can be invaluable for those seeking seasoned investment advice and strategies.

2. Diverse Array of Funds:  American Funds boasts a broad spectrum of mutual funds covering various asset classes and risk profiles. This diversity allows investors to tailor their portfolios to match their unique investment goals and risk tolerance levels.

3. Cost-Effectiveness: American Funds typically maintains relatively low expense ratios compared to many other mutual fund providers. Lower expenses translate to higher net returns for investors, as less of their investment gains are eroded by fees.

4. Strong Long-Term Performance: Many of American Funds' mutual funds exhibit impressive long-term performance records. This consistent track record can be attractive to investors seeking to grow their wealth steadily over time.

5. Responsive Customer Service: American Funds is known for its responsive customer service, offering investors access to knowledgeable investment advisors who can assist them in navigating the intricacies of their funds and making well-informed investment decisions.

Cons:

1. High Minimum Investment Requirements: Some American Funds may have substantial minimum investment thresholds, potentially excluding smaller investors or those just embarking on their investment journey.

2. Transaction Fees: While American Funds' expense ratios are generally favorable, investors may encounter transaction fees for certain types of transactions, such as buying or selling shares.  There are a lot of ways to invest outside of American Funds that cost less or over a more compelling investment process.  

3. Active Management Risk: Many of American Funds' mutual funds are actively managed, relying on the expertise of fund managers to select investments. While this approach can lead to outperformance, it also exposes investors to the risk of underperformance or poor investment decisions.  Investment research and Academic Studies show, Active Management is a very hard game to plan and it is really hard for these strategies to complete with other market options net of fees and time.  

4. Potential for Conflicts of Interest: Investing directly with American Funds may entail the risk of encountering conflicts of interest. For instance, the firm might prioritize promoting its own funds over potentially superior alternatives.

5. Tax Considerations: Holding American Funds outside of retirement accounts could subject investors to high annual tax drag. It's crucial to consider the tax implications of investment decisions carefully.

6. Limited Diversification: Exclusively investing in American Funds may limit an investor's ability to diversify their portfolio adequately. American Funds' lineup lacks exposure to certain compelling asset classes like commodities, private placements, interval funds, private equity, preferred stocks, convertible stocks, small-cap value stocks, collateralized loan obligations (CLOs), and energy investments.

Summary Overview

Limited Means - Legacy Provider - At Sterling Edge Financial we see American Funds as a Legacy investment provider that brings value and accessibility to retail investors with limited means (Investing less than $25,000 or investing less than $200 per month.)

Not Compelling - In general, we think investors can find more compelling investment offerings outside of American Funds given their line up, offering and experience as of 2024.  

SIMPLE IRA Exception - One exception would be the SIMPLE IRA space. There are limited offerings for SIMPLE IRAs.  American Funds SIMPLE IRA is a compelling (as of 2024) offering for business owners to consider even with the above limitations.  (Request meeting for more details to learn if this would apply to your situation). 

Being mindful all investors have different needs, expectations and means, investors should consider the above for information purposes only in preparation for a meeting with a licensed advisor at Sterling Edge Financial.  

Disclosures 

Diversification across various asset classes is a cornerstone of prudent investment strategy, aiming to mitigate risk and optimize returns. Therefore, investors should carefully assess their investment objectives and explore options beyond American Funds to ensure their portfolios are appropriately diversified and aligned with their long-term financial goals.