Stock Mutual Funds for Long Term Goals Financial Planning for Women Jean Lown, FCHD Dept., USU PowerPoint by Tiffany Smith Students from the Advanced Family Finance Class
Why Stocks for the Long Run?
Higher risk = higher potential returns
Historic average annual rates of return
Small companies 12%
Large companies 10%
Cash equivalents 3%
Inflation averages 3.1%/year
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 the portfolio
Why Mutual Funds?
Own a piece of many companies
For a small $ amount you gain a great deal of diversification in your portfolio.
Easy to match your investment objective
Convenient to purchase and sell
Mutual Fund Costs
ALL mutual funds charge management fees
Expressed as a % of fund assets
NOT charged directly to each investor but subtracted from fund assets before gains are distributed to investors
Compare Expense Ratios (%)
Lower is better
Load vs. No-Load
Load funds charge commissions
~5% of the amount you invest
Financial sales persons sell load funds
No-load (no commission) funds
Sold directly to investor
800 phone number
Criteria for Choosing a Stock Mutual Fund
Risks & Volatility
Diversification: more is better
Minimum Initial/Subsequent Investment
Automatic investment plan
Focus on the Future
“Past performance is no guarantee of future returns.”
It’s very difficult to beat “the market” in any one year and even harder to do this consistently.
The only thing you know about the future is the expense ratio.
Index vs. Actively Managed Funds
Management Fees are lower.
Low turnover rate
10%-12% or slightly lower return on investments depending on which 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
Common Stock Indexes
S & P 500- 500 largest U.S. companies
Wilshire 5000 – all U.S. publicly traded corporations from small to large
Individual Retirement Accounts
Interest earned on the account is not taxed while it is growing for retirement
When withdrawn it may or may not be taxed depending on whether it is a Traditional or Roth IRA
Contributions are non-deductible
Grows tax free
Is not taxed when withdrawn at retirement.
Is the objective of the fund Income or Growth?
For long term investing Growth is the better choice.
Income funds are mostly based in bonds that provide a cash return and a lower interest rate.
Most funds have a large initial hurdle to overcome to get started.
Lower subsequent investments once in the door.
Funds charge investors fees and expenses.
A fund with high costs must perform better than a low-cost fund to generate the same returns for you.
Even small differences in fees can translate into large differences in returns over time.
if you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725.
But if the fund had expenses of only 0.5%, then you would end up with $60,858 – an 18% difference.
Turnover ratio: measures how long a fund holds on to the stocks it buys. If a mutual fund trades often, it will have a high turnover ratio. It is better to have a lower turnover rate since every time it buys and sells, the stock incurs cost and the more cost, the higher the capital gains will be taxed.
Bottom line: the lower the turnover rate the better.
SEC Cost Calculator
Funds Chosen by Adv. FF Class
Vanguard 500 Index
Vanguard Total Stock Market Index
T. Rowe Price Equity Index
Mairs & Power
Vanguard 500 Index
Objective – Track the S&P 500 index large-cap stocks