Mutual Funds for Long Term Goals (IRAs ) Financial Planning for Women PowerPoint by Tiffany Smith Students from Advanced F...
Summer FPW <ul><li>June 13:  Estate Planning.  Rock Allen, attorney </li></ul><ul><li>July 11::  Five Timeless Principles ...
Overview <ul><li>Invest in stocks for the long run  </li></ul><ul><li>IRA review  </li></ul><ul><li>What is a mutual fund?...
 
Why Stocks for the Long Run?  <ul><li>Higher risk = higher potential returns </li></ul><ul><ul><li>Risk = volatility (annu...
Individual Retirement Accounts <ul><li>Tax-advantaged investing </li></ul><ul><ul><li>the account is not taxed while it is...
Traditional Vs. Roth IRA <ul><li>Contributions  may be  tax-deductible </li></ul><ul><ul><li>Depends on income & employer ...
Questions?
What is a Mutual Fund?  <ul><li>A company that pools money from many investors to buy a wide variety of securities (stocks...
Why Mutual Funds?  <ul><li>Diversification </li></ul><ul><ul><li>Own a piece of many companies </li></ul></ul><ul><ul><li>...
Load vs. No-Load <ul><li>Load funds are sold by financial sales people who charge commissions  </li></ul><ul><ul><li>~5% o...
Index vs. Actively Managed Funds <ul><li>Index </li></ul><ul><li>Tracks a market index </li></ul><ul><ul><li>S&P 500 </li>...
How to Choose a Mutual Fund <ul><li>Investment Objective </li></ul><ul><li>Diversification: more is better </li></ul><ul><...
Initial/Subsequent Investment <ul><li>Most funds require a large initial investment (i.e., $1,000 – 3,000) </li></ul><ul><...
Expenses/Custodial Fees <ul><li>Funds charge investors fees and expenses. </li></ul><ul><li>A fund with high costs must pe...
MF Expense Analyzer <ul><li>Compares cost of owning a fund over time based on the fund’s expense ratio </li></ul><ul><li>N...
Expense Example <ul><li>Invest $10,000 for 20 years in a fund w/ 10% annual return </li></ul><ul><ul><li>1.5% expense rati...
Questions?
Funds Chosen by Adv. FF Class <ul><li>Index </li></ul><ul><ul><li>Vanguard Total Stock Market Index </li></ul></ul><ul><li...
Target Retirement Date Funds <ul><li>Objective: seek capital appreciation through diversification </li></ul><ul><ul><li>ma...
Target Date Retirement
Vanguard Target Retirement <ul><li>Inception date:  2003 </li></ul><ul><ul><li>underlying funds have much longer track rec...
Target Retirement Funds <ul><li>2045: For people in their 20s who plan to retire between 2040 & 2049 </li></ul><ul><ul><li...
Underlying Vanguard Funds  (asset allocation) 2045 Fund <ul><li>Stocks </li></ul><ul><ul><li>Total Stock Market Index Fund...
Vanguard Target Retirement <ul><li>Initial Investment: </li></ul><ul><li>$3,000 in IRA or non-IRA </li></ul><ul><li>Subseq...
T. Rowe Price Target Date  <ul><li>Inception date:  2005 </li></ul><ul><ul><li>underlying funds have much longer track rec...
T. Rowe Price Target Date  <ul><li>Initial Investment: </li></ul><ul><ul><li>$2,500 non-IRA </li></ul></ul><ul><ul><li>$1,...
Vanguard Total Stock Market Index   <ul><li>Objective – Track the MSCI index of  all U.S. stocks  </li></ul><ul><li>Minimu...
Vanguard Total Stock Market Index   <ul><li>Asset Allocation </li></ul><ul><ul><li>Stocks 98.3% </li></ul></ul><ul><ul><li...
Homestead Value Fund <ul><li>Actively managed </li></ul>
Objectives <ul><li>Low Volatility </li></ul><ul><ul><li>Diversification </li></ul></ul><ul><ul><li>Low Turnover (13%) </li...
Investment Requirements <ul><li>Amazing! </li></ul><ul><li>Only $500 for an initial investment, $200 if invested within an...
Expense Ratio <ul><li>Ratio is .76% </li></ul><ul><li>Experts recommend a ratio less than 1.4%  Clements,J. (2000).  Cutti...
Historical Returns S&P 500 Index Homestead 8.42% 6.19% 10.44% 9.94% 10.85% 14.46% 10 year 5 year 3 year
Rating Systems <ul><li>Morningstar’s Stars: **** </li></ul><ul><li>Business Week: B </li></ul><ul><li>Consumer Reports: 82...
Selling Points <ul><li>Not the end all-only fund you’ll ever need but it’s a great place to get started: </li></ul><ul><ul...
Contact Information <ul><li>Homesteadfunds.com </li></ul><ul><li>Ticker: HOVLX </li></ul><ul><li>1-800-258-3030  </li></ul...
Focus on the Future <ul><li>“Past performance is no guarantee of future returns.” </li></ul><ul><li>It’s very difficult to...
How to Choose?  <ul><li>If you can afford $3,000 investment </li></ul><ul><ul><li>Vanguard Total Stock Market Index </li><...
How to open an IRA <ul><li>Simple process </li></ul><ul><ul><li>Online </li></ul></ul><ul><ul><li>Call and get forms in ma...
How Does Your IRA Compare?  <ul><li>Want to transfer to one of our recommendations?  </li></ul>
It’s not magic, just do your homework
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Mutual Funds for your IRA 2007

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Mutual Funds for your IRA 2007

  1. 1. Mutual Funds for Long Term Goals (IRAs ) Financial Planning for Women PowerPoint by Tiffany Smith Students from Advanced Family Finance Class: Christine Ballard, AddieAnn Hancock, Danielle Walker, Jodi Miller
  2. 2. Summer FPW <ul><li>June 13: Estate Planning. Rock Allen, attorney </li></ul><ul><li>July 11:: Five Timeless Principles of Investing. Jeff Salisbury, fee-only investment advisor </li></ul><ul><li>August 8: Choosing and Working with a Financial Advisor . Allen Marler, CFP </li></ul>
  3. 3. Overview <ul><li>Invest in stocks for the long run </li></ul><ul><li>IRA review </li></ul><ul><li>What is a mutual fund? </li></ul><ul><li>How to choose a mutual fund </li></ul><ul><li>Specific MF recommendations based on students’ research </li></ul>
  4. 5. Why Stocks for the Long Run? <ul><li>Higher risk = higher potential returns </li></ul><ul><ul><li>Risk = volatility (annual returns = -50%-+50%) </li></ul></ul><ul><li>Historic average annual rates of return </li></ul><ul><ul><li>Stocks 10% </li></ul></ul><ul><ul><li>Bonds 6% </li></ul></ul><ul><ul><li>Cash equivalents (CDs) 3% </li></ul></ul><ul><li>Inflation averages 3.1%/year </li></ul>
  5. 6. Individual Retirement Accounts <ul><li>Tax-advantaged investing </li></ul><ul><ul><li>the account is not taxed while it is growing </li></ul></ul><ul><ul><li>When $ is withdrawn in retirement </li></ul></ul><ul><ul><ul><li>Traditional IRA withdrawals are taxed </li></ul></ul></ul><ul><ul><ul><li>Roth IRA withdrawals are tax-free </li></ul></ul></ul>
  6. 7. Traditional Vs. Roth IRA <ul><li>Contributions may be tax-deductible </li></ul><ul><ul><li>Depends on income & employer sponsored plan </li></ul></ul><ul><li>$ is taxed when withdrawn at retirement </li></ul><ul><li>Must start withdrawals at 70 ½ (spend during lifetime) </li></ul><ul><li>Contributions are not tax-deductible </li></ul><ul><li>$ is not taxed when withdrawn at retirement </li></ul><ul><li>Do not have to start withdrawals at age 70 ½ </li></ul><ul><li>Can bequeath to heirs </li></ul>
  7. 8. Questions?
  8. 9. What is a Mutual Fund? <ul><li>A company that pools money from many investors to buy a wide variety of securities (stocks, bonds, etc.) </li></ul><ul><li>Automatic diversification </li></ul><ul><ul><li>Each investor owns a pro-rata share of all investments in the portfolio </li></ul></ul><ul><li>Professional management </li></ul>
  9. 10. Why Mutual Funds? <ul><li>Diversification </li></ul><ul><ul><li>Own a piece of many companies </li></ul></ul><ul><ul><li>For a small $ amount you gain a great deal of diversification </li></ul></ul><ul><li>Easy to match your investment objective </li></ul><ul><li>Convenient to purchase and sell </li></ul>
  10. 11. Load vs. No-Load <ul><li>Load funds are sold by financial sales people who charge commissions </li></ul><ul><ul><li>~5% of every $, every time you invest </li></ul></ul><ul><li>No-load (no commission) funds </li></ul><ul><ul><li>Sold directly to investor (no salesperson) </li></ul></ul><ul><ul><ul><li>web sites </li></ul></ul></ul><ul><ul><ul><li>800 phone number </li></ul></ul></ul><ul><ul><ul><li>mail </li></ul></ul></ul>
  11. 12. Index vs. Actively Managed Funds <ul><li>Index </li></ul><ul><li>Tracks a market index </li></ul><ul><ul><li>S&P 500 </li></ul></ul><ul><ul><li>DJ Wilshire 5000 </li></ul></ul><ul><li>Fees are low </li></ul><ul><li>Low turnover rate </li></ul><ul><li>Investment returns mirror the index </li></ul><ul><li>Actively Managed </li></ul><ul><li>Higher management fees </li></ul><ul><li>Higher turnover rate </li></ul><ul><li>it is uncommon for the return to be higher than its index for extended periods </li></ul>
  12. 13. How to Choose a Mutual Fund <ul><li>Investment Objective </li></ul><ul><li>Diversification: more is better </li></ul><ul><li>No-Load </li></ul><ul><li>Low expense ratio </li></ul><ul><li>Minimum Initial/Subsequent Investment </li></ul><ul><ul><li>Automatic investment plan </li></ul></ul><ul><li>Independent ratings </li></ul>
  13. 14. Initial/Subsequent Investment <ul><li>Most funds require a large initial investment (i.e., $1,000 – 3,000) </li></ul><ul><li>Lower subsequent minimum investments once in the fund ($50-250) </li></ul><ul><li>A few funds allow you to bypass initial investment if you set up automatic investment plan (AIP) </li></ul>
  14. 15. Expenses/Custodial Fees <ul><li>Funds charge investors fees and expenses. </li></ul><ul><li>A fund with high costs must perform better than a low-cost fund to generate the same returns. </li></ul><ul><li>Small differences in fees can translate into large differences in returns over time. </li></ul>
  15. 16. MF Expense Analyzer <ul><li>Compares cost of owning a fund over time based on the fund’s expense ratio </li></ul><ul><li>National Association of Securities Dealers (NASD) </li></ul><ul><li>Compare 3 funds at a time </li></ul><ul><li>http://apps. nasd .com/investor_Information/ea/ nasd / mfetf . aspx </li></ul>
  16. 17. Expense Example <ul><li>Invest $10,000 for 20 years in a fund w/ 10% annual return </li></ul><ul><ul><li>1.5% expense ratio; grows to $49,725 </li></ul></ul><ul><ul><li>0.5% expense ratio; grows to $60,858 </li></ul></ul><ul><ul><ul><li>18% more! </li></ul></ul></ul><ul><ul><li>Average expense ratio for stock MFs = 1.5% </li></ul></ul><ul><ul><li>Index funds charge very low expenses </li></ul></ul>
  17. 18. Questions?
  18. 19. Funds Chosen by Adv. FF Class <ul><li>Index </li></ul><ul><ul><li>Vanguard Total Stock Market Index </li></ul></ul><ul><li>Target Retirement Date </li></ul><ul><ul><li>Vanguard 2045 Fund </li></ul></ul><ul><ul><li>T. Rowe Price </li></ul></ul><ul><li>Actively managed </li></ul><ul><ul><li>Homestead Value </li></ul></ul>
  19. 20. Target Retirement Date Funds <ul><li>Objective: seek capital appreciation through diversification </li></ul><ul><ul><li>managed according to your stage in life </li></ul></ul><ul><ul><li>become more conservative over time </li></ul></ul><ul><ul><ul><li>Automatic rebalancing </li></ul></ul></ul><ul><li>Invest in existing funds from same family </li></ul><ul><ul><li>U.S. & international stocks & bonds </li></ul></ul>
  20. 21. Target Date Retirement
  21. 22. Vanguard Target Retirement <ul><li>Inception date: 2003 </li></ul><ul><ul><li>underlying funds have much longer track record </li></ul></ul><ul><li>Expense Ratio: 0.21% </li></ul><ul><li>12% return since inception </li></ul><ul><li>Expect 8-10% returns over long run </li></ul>
  22. 23. Target Retirement Funds <ul><li>2045: For people in their 20s who plan to retire between 2040 & 2049 </li></ul><ul><ul><li>94% invested in U.S. & international stocks </li></ul></ul><ul><li>Other funds for earlier retirement dates: </li></ul><ul><ul><li>2035: 77% stocks/23% bonds </li></ul></ul><ul><ul><li>2025: 59% stocks/41% bonds </li></ul></ul><ul><ul><li>2015: 49% stocks/48% bonds/3% inflation-protected </li></ul></ul><ul><ul><li>2005: 33% stocks/49% bonds/18% inflation-protected </li></ul></ul>
  23. 24. Underlying Vanguard Funds (asset allocation) 2045 Fund <ul><li>Stocks </li></ul><ul><ul><li>Total Stock Market Index Fund 70.7% </li></ul></ul><ul><ul><li>European Stock Index Fund 11.8% </li></ul></ul><ul><ul><li>Pacific Stock Index Fund 11.6% </li></ul></ul><ul><li>Bonds Total Bond Market Index Fund 5.9% </li></ul>
  24. 25. Vanguard Target Retirement <ul><li>Initial Investment: </li></ul><ul><li>$3,000 in IRA or non-IRA </li></ul><ul><li>Subsequent Investment: </li></ul><ul><li>$100 or $50 w/ AIP </li></ul>
  25. 26. T. Rowe Price Target Date <ul><li>Inception date: 2005 </li></ul><ul><ul><li>underlying funds have much longer track record </li></ul></ul><ul><li>Expense Ratio: 0.76% </li></ul><ul><li>11% return since inception </li></ul><ul><li>Expect 8-10% returns over long run </li></ul>
  26. 27. T. Rowe Price Target Date <ul><li>Initial Investment: </li></ul><ul><ul><li>$2,500 non-IRA </li></ul></ul><ul><ul><li>$1,000 in IRA </li></ul></ul><ul><li>Subsequent Investment: </li></ul><ul><ul><li>$100 or $50 w/ AIP </li></ul></ul>
  27. 28. Vanguard Total Stock Market Index <ul><li>Objective – Track the MSCI index of all U.S. stocks </li></ul><ul><li>Minimum initial investment = $3,000 </li></ul><ul><li>Minimum Subsequent =$100 /$50 (AIP) </li></ul><ul><li>0.19% Expense Ratio </li></ul><ul><li>8.92% Average return for 10 years </li></ul>
  28. 29. Vanguard Total Stock Market Index <ul><li>Asset Allocation </li></ul><ul><ul><li>Stocks 98.3% </li></ul></ul><ul><ul><li>Cash 1.0% </li></ul></ul><ul><ul><li>Other 0.7% </li></ul></ul><ul><li>Suitable for long term investors seeking maximum returns & willing to endure market volatility </li></ul><ul><ul><li>Remember 2000-2003? </li></ul></ul>
  29. 30. Homestead Value Fund <ul><li>Actively managed </li></ul>
  30. 31. Objectives <ul><li>Low Volatility </li></ul><ul><ul><li>Diversification </li></ul></ul><ul><ul><li>Low Turnover (13%) </li></ul></ul><ul><ul><li>Hold stocks for average of 10 years </li></ul></ul><ul><li>Low Risk </li></ul><ul><ul><li>Solid industries and underlying companies </li></ul></ul><ul><ul><li>Sharpe Ratio of 1.46 </li></ul></ul>
  31. 32. Investment Requirements <ul><li>Amazing! </li></ul><ul><li>Only $500 for an initial investment, $200 if invested within an IRA </li></ul><ul><li>No subsequent investment minimums </li></ul><ul><li>Affordable on any budget! </li></ul>
  32. 33. Expense Ratio <ul><li>Ratio is .76% </li></ul><ul><li>Experts recommend a ratio less than 1.4% Clements,J. (2000). Cutting Through Mutual Fund Clutter. The Wall Street Journal . May 2000. D1 </li></ul><ul><li>NASD Calculations $10,000 initial investment assuming 5% return, 20 years equals expenses of $2,352 </li></ul><ul><li>Use NASD to compare to other fund’s expenses </li></ul>
  33. 34. Historical Returns S&P 500 Index Homestead 8.42% 6.19% 10.44% 9.94% 10.85% 14.46% 10 year 5 year 3 year
  34. 35. Rating Systems <ul><li>Morningstar’s Stars: **** </li></ul><ul><li>Business Week: B </li></ul><ul><li>Consumer Reports: 82/100 </li></ul>
  35. 36. Selling Points <ul><li>Not the end all-only fund you’ll ever need but it’s a great place to get started: </li></ul><ul><ul><li>Good for long term investors </li></ul></ul><ul><ul><li>Low investment minimum, can set up subsequent investment minimums to fit your individual budget </li></ul></ul><ul><ul><li>Management Tenure is 33 years </li></ul></ul><ul><ul><li>Solid returns which outperform its index (Goal of actively managed funds) </li></ul></ul>
  36. 37. Contact Information <ul><li>Homesteadfunds.com </li></ul><ul><li>Ticker: HOVLX </li></ul><ul><li>1-800-258-3030 </li></ul><ul><li>What questions do you have? </li></ul>
  37. 38. Focus on the Future <ul><li>“Past performance is no guarantee of future returns.” </li></ul><ul><li>It’s very difficult to beat “the market” (represented by an index such as S&P 500) in any one year and even harder to do this consistently. </li></ul><ul><li>The only thing you know about the future is the fund’s expense ratio. </li></ul>
  38. 39. How to Choose? <ul><li>If you can afford $3,000 investment </li></ul><ul><ul><li>Vanguard Total Stock Market Index </li></ul></ul><ul><ul><ul><li>Own a representative sample of all publicly traded U.S. stocks (with low expenses) </li></ul></ul></ul><ul><ul><li>Vanguard Target Retirement Fund </li></ul></ul><ul><ul><ul><li>Widely diversified investment classes (stocks & bonds) </li></ul></ul></ul><ul><ul><ul><li>Less volatile than 100% stocks </li></ul></ul></ul><ul><ul><ul><li>Rebalances automatically as you approach retirement </li></ul></ul></ul><ul><li>To start with low initial investment $50 AIP </li></ul><ul><ul><li>T. Rowe Price Target Date Retirement Fund </li></ul></ul><ul><li>Have $200? Don’t want to commit to AIP? </li></ul><ul><ul><li>Homestead Value </li></ul></ul>
  39. 40. How to open an IRA <ul><li>Simple process </li></ul><ul><ul><li>Online </li></ul></ul><ul><ul><li>Call and get forms in mail </li></ul></ul>
  40. 41. How Does Your IRA Compare? <ul><li>Want to transfer to one of our recommendations? </li></ul>
  41. 42. It’s not magic, just do your homework
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