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MUTUAL FUNDS: No-Load Funds for No-Nonsense Investors

--Tactical market timing can help an investor dodge the worst of stocks' volatility, according to Sheldon Jacobs --Jacobs supports so-called 'fundamental indexing' --Funds that focus on a companhy's business funadmentals recognize the changed landscape for investors post-2008, he says By Jonathan Burton Almost a decade after selling his well-regarded The No-Load Fund Investor newsletter, former editor Sheldon Jacobs is still a fan of mutual funds and exchange-traded funds, just not necessarily to buy and hold. Erratic stock markets such as this one call for nimble moves. "Think about market timing," Jacobs said in a recent telephone interview. Tactical market timing, he noted, can help an investor dodge the worst of stocks' volatility. Jacobs doesn't go for trendy, alternative investment products. He doesn't believe most people should own individual stocks. But he strongly supports--and even prefers--so-called fundamental indexing, which challenges the traditional market-value, or capitalization-weighted construction of standard benchmarks such as the Standard & Poor's 500-stock index. Funds that focus on a company's business fundamentals, Jacobs points out, recognize the changed landscape for investors post-2008. To Jacobs, this less-forgiving environment of lower investment returns, what's often called the "New Normal," requires unorthodox measures if you hope to outperform. A fundamental index is equipped for hostile terrain. In these portfolios, cash flow, book value, sales and dividends matter most. Advocates say this strategy steers investors clear of speculative markets and high-flying stocks that can fall hard and fast. For example, fundamentally weighted PowerShares FTSE RAFI US 1000 Portfolio (PRF) has its greatest exposure to financial-services stocks and gives just 0.6% of its portfolio to Apple Inc. (AAPL). In contrast, the largest U.S. stock by market value reflects more than 4% of the cap-weighted iShares Russell 1000 Index Fund (IWB), which counts technology as its top sector. Over the past three years through July 5, the PowerShares ETF has delivered a 19.2% annualized gain, while its iShares rival is up 17.6%, according to investment researcher Morningstar Inc. Moreover, so far in this year's seesaw market the PowerShares fund's 7.8% return is more than double the iShares fund's 3.4% gain. Investors can certainly stick to broad, cap-weighted stock-index funds, Jacobs said--he owns shares in Vanguard Total Stock Market Index Fund (VTSMX), for instance. Just be careful not to get caught up in the euphoria of a cap-weighted market bubble. Jacobs suggests that investors keep a 50-50 split between cap-weighted and fundamentally weighted products. Other stock-index funds he recommends include the cap-weighted Vanguard FTSE All-World ex-U.S. Fund (VFWIX) and Fidelity Small Cap Enhanced Index Fund (FCPEX) and the fundamental PowerShares FTSE RAFI US 1500 Small-Mid Portfolio (PRFZ). Also making Jacobs's list are products from Charles Schwab Corp. (SCHW), which offers both cap-weighted and fundamental index funds. Among his favorites: Schwab Total Stock Market Index Fund (SWTSX) and its fundamental peer, Schwab Fundamental U.S. Large Company Index Fund (SFLNX). For investors who use exchange-traded funds, Jacobs has assembled a portfolio of Vanguard Total Stock Market (VTI), PowerShares FTSE RAFI US 1000, Vanguard Small-Cap (VB), iShares MSCI EAFE (EFA), and SPDR S&P International Small Cap (GWX). Bond holdings in this all-ETF mix include iShares Barclays 7-10 Year Treasury Bond Fund (IEF) and Vanguard Intermediate Term Bond (BIV). "I'm really interested in simplifying matters," Jacobs said. "You can do a very adequate job of investing with virtually no work at all." War on Fees Now 81, Jacobs has seen plenty of changes in the fund industry since founding his monthly newsletter in 1979. Back then, most actively managed funds levied an upfront sales charge, or load. The no-load alternative was revolutionary, a pocketbook protest against a costly status quo. Independent-minded discount brokerages, such as Schwab offered assistance, providing low-commission trading and encouraging do-it-yourself fund investing. Individual investors and financial advisers have since embraced no-load vehicles. At the end of 2011, no-load funds controlled almost 70% of the industry's assets under management. That said, the fight over load or no-load doesn't matter much anymore. Fund firms routinely waive loads for investment advisers and sell their wares in no-load fund "supermarkets," while many brokers collect a flat fee for money management. The new battleground in the fund business is between traditional mutual funds and increasingly popular ETFs. Still, even today mutual funds are sold and not bought. Customers have to be careful that a broker or financial adviser isn't pushing his own company's inferior, higher-cost products to make more money for himself and the firm at your expense. Financial Freedom Jacobs is out with a book that encapsulates his do-it-yourself, low-cost approach to buying and selling funds. The recently published "Investing Without Wall Street: The Five Essentials of Financial Freedom" is a straightforward look at how to tune out the market's noise and turn on your own playlist. The "essentials" probably won't be new to most investors: determine an appropriate asset allocation, properly diversify within asset classes, understand and control risk, keep costs low. Yet while these building blocks of investing seem elementary, the fact is that many people struggle to build a responsive, proactive portfolio around them. Instead they typically trade first and too often regret later. What is the "right" portfolio asset allocation? There isn't one, Jacobs said. His own portfolio consists of about 41% in stock funds, 51% in bonds (mostly municipals) and 8% in cash. "Carry that [equity percentage] number around in your head," Jacobs said. "That's the most important number you've got, and has the greatest consequences if you're wrong." Then there's his fifth essential: Follow the "right" financial media and be discriminating about what you see and hear. It's a curious addition, though it makes sense given the 24-hour barrage of news and information--or what passes for it--that investors are exposed to nowadays. "If you do the five essentials correctly," Jacobs said, "it doesn't matter much what stocks or mutual funds you pick." Write to Jonathan Burton at

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