Mutual Funds for Long Term Goals (IRAs ) Financial Planning for Women Jean Lown, FCHD Dept., USU PowerPoint by Tiffany Smith Students from Advanced Family Finance Carrie Baugh, Jenny Olsen, Sarah Doxey, Daneal Francisco, & Natalie Nesbit
Invest in stocks for the long run
What is a mutual fund?
How to choose a mutual fund
Specific MF recommendations based on students’ research
Why Stocks for the Long Run?
Higher risk = higher potential returns
Risk = volatility (annual returns = -50%-+50%)
Historic average annual rates of return
Cash equivalents (CDs) 3%
Inflation averages 3.1%/year
Individual Retirement Accounts
the account is not taxed while it is growing for retirement
When withdrawn, $ may or may not be taxed depending on whether it is a Traditional or Roth IRA
Traditional Vs. Roth IRA
Contributions may be tax-deductible
Depends on income & employer sponsored plan
$ is taxed when withdrawn at retirement
Must start withdrawals at 70 ½ (spend during lifetime)
Contributions are not tax-deductible
$ is not taxed when withdrawn at retirement
Do not have to start withdrawals at age 70 ½
Can bequeath to heirs
What is a Mutual Fund?
A company that pools money from many investors to buy a variety of different securities (stocks, bonds, etc.)
Each investor owns a pro-rata share of all investments in the portfolio
Why Mutual Funds?
Own a piece of many companies
For a small $ amount you gain a great deal of diversification.
Easy to match your investment objective
Convenient to purchase and sell
Load vs. No-Load
Load funds are sold by financial sales people who charge commissions
~5% of every $, every time you invest
No-load (no commission) funds
Sold directly to investor (no salesperson)
800 phone number
Index vs. Actively Managed Funds
Tracks a market index
DJ Wilshire 5000
Fees are lower
Low turnover rate
Investment returns mirror the index
Higher management fees
Higher turnover rate
Rate of return can be higher but it is uncommon for it to be higher than an index for long periods of time
Criteria for Choosing a Mutual Fund
Diversification: more is better
Low expense ratio
Minimum Initial/Subsequent Investment
Automatic investment plan
Most funds require a large initial investment (i.e., $1,000 – 3,000)
Lower subsequent minimum investments once in the fund ($50-250)
A few funds allow you to bypass initial investment if you set up automatic investment plan (AIP)
Funds charge investors fees and expenses.
A fund with high costs must perform better than a low-cost fund to generate the same returns.
Small differences in fees can translate into large differences in returns over time.
MF Expense Analyzer
Compares cost of owning a fund over time based on the fund’s expense ratio