by Archie M. Richards, Jr., CFP^®
March 8, 2004

Jerry wants my opinion of the Oppenheimer Main Street Fund, especially the Class C shares.

Here are the costs of all three classes, Jerry:

Class A: A front-end charge of 5.75 percent (reduced for amounts over $25,000). The annual costs are 0.97 percent.

Class B: No front-end charge, but annual costs are 1.81 percent. If you sell the shares, you also pay a redemption charge starting at 5 percent, gradually dropping over 6 years to zero. If you still hold the fund after 6 years, the Class B shares convert to Class A, with annual costs of 0.97 percent.

Class C: No front-end charge, but the annual costs are 1.74 percent indefinitely.

We'll assume an investment of $10,000 in each of the three classes. The investments themselves grow at 10 percent a year.

Class A: After the 5.75 percent front-end charge, the net investment is $9425. This grows at 9.03 percent (10 less 0.97). In 30 years, the fund is worth $126,085.

Class B: $10,000 grows at 8.19 percent (10 less 1.81) for 6 years, attaining $16,037. This grows for an additional 24 years at 9.03 percent (10 less 0.97), reaching $127,711.

Class C: $10,000 grows at 8.26 percent (10 less 1.74) for 30 years, reaching $108,154. Class C is the worst of the three.

Class C shares are designed for short-term holders. But if you have only a limited time before you need the money, don't buy stocks at all. And if you're planning to move to another investment after a short time, you'll probably switch at the wrong time to the wrong investment. Few people outsmart the stock market consistently in the short term.

Every time you put your money into Class C shares of any fund, the broker receives about 1 percent. (Actually, the brokerage firm receives the 1 percent. It pays about half to the individual broker.) Every year that you don't sell Class C shares, the brokerage firm receives only 0.25 percent. To enhance his income, the broker is likely every few years to suggest that you move the money to Class C shares of another fund family.

Oh, mutual funds don't use the word "commissions" in connection with Class B and C shares. They say "expenses." But the costs are commissions, believe me, and you pay them.

Oppenheimer's Main Street is an actively-managed fund. The management performs stock research in an effort to beat the market. The Main Street Fund certainly beats keeping your money in the bank. But I prefer index funds. They avoid the cost of stock research by buying the stocks that are included in a market index the fund is endeavoring to mirror.

As an alternative to Oppenheimer, assume you invest $10,000, half in the Vanguard Total Stock Market Index (annual costs of 0.20 percent) and the other half in the Vanguard Total International Stock Market Index Fund (annual costs of 0.37 percent). I include foreign stocks because I expect them to perform especially well in coming years. Between the two funds, the annual costs average 0.29 percent (.20 plus .37 divided by 2). Vanguard funds have no sales charges.

The $10,000 grows at 9.71 percent (10 less 0.29). In 30 years, the account is worth $161,208. This is $33,000 more than the best of the Main Street classes above ($127,711).

The rate of turnover in the Main Street fund is approximately 75 percent. Three-quarters of the portfolio is bought and sold within a year. The turnover rate for the two Vanguard funds is only about 10 percent a year. Higher turnover means higher transaction costs and higher short-term capital gains, which are taxed at high rates.

I estimate that the investments made by the Main Street Fund would have to beat the two Vanguard funds by at least 2.5 percent a year to provide the same after-tax return. Can Oppenheimer accomplish this?

Not likely.

Since you're reading my column, Jerry, and even have the gumption to write me, why do you need a broker? Just buy the two Vanguard funds, spread your money throughout the world, and watch it grow.

With rock-bottom costs.