IRA picks from 2005
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IRA picks from 2005

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    IRA picks from 2005 IRA picks from 2005 Presentation Transcript

    • 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
        • Stocks
          • Small companies 12%
          • Large companies 10%
        • Bonds 6%
        • 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
      • Professional management
      • Automatic diversification
    • Why Mutual Funds?
      • Diversification
        • 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
          • web sites
          • 800 phone number
          • mail
    • Criteria for Choosing a Stock Mutual Fund
      • Investment Objective
      • Risks & Volatility
      • Diversification: more is better
      • Expenses
      • 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
      • Index
      • Management Fees are lower.
      • Low turnover rate
      • 10%-12% or slightly lower return on investments depending on which index
      • Actively Managed
      • 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
      • Tax-advantaged investing
        • 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
    • Roth IRA
      • Contributions are non-deductible
      • Grows tax free
      • Is not taxed when withdrawn at retirement.
    • Investment Objective
      • 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.
    • Initial/Subsequent Investment
      • Most funds have a large initial hurdle to overcome to get started.
      • Lower subsequent investments once in the door.
    • Expenses
      • 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.
    • Expense Example
      • 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
      • 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
      • http://www.sec.gov/
    • Funds Chosen by Adv. FF Class
      • Index
        • Vanguard 500 Index
        • Vanguard Total Stock Market Index
        • T. Rowe Price Equity Index
      • Actively managed
        • Homestead Value
        • Mairs & Power
    • Vanguard 500 Index
      • Objective – Track the S&P 500 index large-cap stocks
      • $1,000 Initial Investment / $100 subsequent / $50 (AIP)
      • 0.18% Expense Ratio
      • 10.72% Return for the last 10 years
      • SEC Cost: $2,380.93
    • Vanguard Total Stock Market Index
      • Objective – Track the Wilshire 5000 index of all U.S. stocks
      • $1,000 Initial Investment / $100 subsequent / $50 (AIP)
      • 0.19% Expense Ratio
      • 10.48% Return for the last 10 years
      • SEC Cost: $2,510.83
    • T. Rowe Price Equity Index
      • Objective: To match the performance of the Standard & Poors 500® Stock Index.
      • IRA AIP: Sign up for $50/month & waive the $1,000 initial minimum
      • 0.35% Expense Ratio
      • 9.95% Return for the last 10 years
      • SEC Cost: $4,555.91
    • Homestead Value
      • Objective – Seeks capital growth over the long term and, secondarily, income
      • $200 Initial Investment /no minimum subsequent
      • 0.82% Expense Ratio
      • 11.03% Return for the last 10 years
      • SEC Cost: $10,214.47
    • Mairs & Power Growth
      • Objective – diversified holding of common stocks; above-average long-term appreciation
      • $1,000 Initial Investment / $100 subsequent
      • 0.75% Expense Ratio
      • 16.51% Return for the last 10 years
      • SEC Cost: $9,403.60
    • How to Choose?
      • If you can afford $1,000 investment
        • Vanguard Total Stock Market Index
          • Own a piece of all the publicly traded U.S. companies with low expenses
      • To start with low minimum:
        • Homestead Value $200/$0
        • T. Rowe Price Equity Index $50 AIP
    • Don’t Wait. Start Today!
      • Handout: call the 800# and ask for prospectus or on-line
      • Fill out the forms and mail today!
      • One more decision
        • Name your beneficiary