• Active versus passive investing: Active mutual funds have a manager or team buying and selling holdings in response to economic and market moves. Passive or “index” investing consists of holding an index without actively trading. Indexing has a low cost and can be effective. For 10 years ending September 2003, the Standard and Poor’s 500 Index returned an average of 10.04 percent, while the average actively managed stock fund returned 8.19 percent in the same period. Although 2 percentage points doesn’t sound like a lot, the difference on an initial $50,000 investment in 25 years is $158,139.
  
  Few actively managed funds beat their benchmark index over an extended time.
  If the manager responsible for a fund’s solid long-term performance leaves, do your homework on his or her replacement.
   
• Loads versus no-load: Loads, or sales commissions, are paid to a stockbroker, financial advisor, or bank salesperson when you purchase a mutual fund through them. There are many different classes, or “shares,” of load mutual funds. The most common are A-shares, B-shares, and C-shares. A-shares charge an average of 5 percent to 6 percent on each new purchase. With B-shares, there is no initial sales charge, but if you sell the fund within a certain time frame (typically five to seven years), you are hit with a back-end charge on the current account balance. C-shares typically charge a 1-percent annual fee against the current account balance, so the commission increases as your account balance increases.
  
  No-load funds do not carry sales commissions and usually are bought directly from fund companies or through discount brokerages. Loads are designed to compensate financial salespeople for providing guidance and advice and can be a good deal if you are getting sound advice. If you are receiving minimal advice, however, consider moving to no-load funds.
   
• Expenses: Mutual funds have annual expenses, which are low for index funds and higher for actively managed funds. The lower the annual expenses and fewer additional fees, the better. Generally, try to avoid bond funds with expenses higher than 0.75 percent, large company funds with expenses higher than 1.0 percent, and small company, international, or specialty funds with expenses higher than 1.5 percent.
   
• Tax efficiency: If you own mutual funds in taxable accounts, watch the tax efficiency or turnover ratio. In general, the higher the turnover ratio, the more buying and selling your fund manager is doing, and the higher the potential tax burden. Index funds are good choices for taxable accounts because of their low turnover.

— Former Army Capt. Phil Dyer, CFP, is deputy director, Benefits Information. For additional financial counseling, MOAA members can contact Garrett Planning Network (GPN) at (866) MOAA-GPN (662-2476) or online at www.garrettplanning.com.