Mutual Funds for your IRA 2007
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Mutual Funds for your IRA 2007

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Mutual Funds for your IRA 2007 Mutual Funds for your IRA 2007 Presentation Transcript

  • 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
  • Summer FPW
    • June 13: Estate Planning. Rock Allen, attorney
    • July 11:: Five Timeless Principles of Investing. Jeff Salisbury, fee-only investment advisor
    • August 8: Choosing and Working with a Financial Advisor . Allen Marler, CFP
  • Overview
    • Invest in stocks for the long run
    • IRA review
    • 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
      • Stocks 10%
      • Bonds 6%
      • Cash equivalents (CDs) 3%
    • Inflation averages 3.1%/year
  • Individual Retirement Accounts
    • Tax-advantaged investing
      • the account is not taxed while it is growing
      • When $ is withdrawn in retirement
        • Traditional IRA withdrawals are taxed
        • Roth IRA withdrawals are tax-free
  • 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    • $ is taxed when withdrawn at retirement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    • $ is not taxed when withdrawn at retirement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
  • Questions?
  • What is a Mutual Fund?
    • A company that pools money from many investors to buy a wide variety of securities (stocks, bonds, etc.)
    • Automatic diversification
      • Each investor owns a pro-rata share of all investments in the portfolio
    • Professional management
  • Why Mutual Funds?
    • Diversification
      • 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)
        • web sites
        • 800 phone number
        • mail
  • Index vs. Actively Managed Funds
    • Index
    • Tracks a market index
      • S&P 500
      • DJ Wilshire 5000
    • Fees are low
    • Low turnover rate
    • Investment returns mirror the index
    • Actively Managed
    • Higher management fees
    • Higher turnover rate
    • it is uncommon for the return to be higher than its index for extended periods
  • How to Choose a Mutual Fund
    • Investment Objective
    • Diversification: more is better
    • No-Load
    • Low expense ratio
    • Minimum Initial/Subsequent Investment
      • Automatic investment plan
    • Independent ratings
  • Initial/Subsequent Investment
    • 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)
  • Expenses/Custodial Fees
    • 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
    • National Association of Securities Dealers (NASD)
    • Compare 3 funds at a time
    • http://apps. nasd .com/investor_Information/ea/ nasd / mfetf . aspx
  • Expense Example
    • Invest $10,000 for 20 years in a fund w/ 10% annual return
      • 1.5% expense ratio; grows to $49,725
      • 0.5% expense ratio; grows to $60,858
        • 18% more!
      • Average expense ratio for stock MFs = 1.5%
      • Index funds charge very low expenses
  • Questions?
  • Funds Chosen by Adv. FF Class
    • Index
      • Vanguard Total Stock Market Index
    • Target Retirement Date
      • Vanguard 2045 Fund
      • T. Rowe Price
    • Actively managed
      • Homestead Value
  • Target Retirement Date Funds
    • Objective: seek capital appreciation through diversification
      • managed according to your stage in life
      • become more conservative over time
        • Automatic rebalancing
    • Invest in existing funds from same family
      • U.S. & international stocks & bonds
  • Target Date Retirement
  • Vanguard Target Retirement
    • Inception date: 2003
      • underlying funds have much longer track record
    • Expense Ratio: 0.21%
    • 12% return since inception
    • Expect 8-10% returns over long run
  • Target Retirement Funds
    • 2045: For people in their 20s who plan to retire between 2040 & 2049
      • 94% invested in U.S. & international stocks
    • Other funds for earlier retirement dates:
      • 2035: 77% stocks/23% bonds
      • 2025: 59% stocks/41% bonds
      • 2015: 49% stocks/48% bonds/3% inflation-protected
      • 2005: 33% stocks/49% bonds/18% inflation-protected
  • Underlying Vanguard Funds (asset allocation) 2045 Fund
    • Stocks
      • Total Stock Market Index Fund 70.7%
      • European Stock Index Fund 11.8%
      • Pacific Stock Index Fund 11.6%
    • Bonds Total Bond Market Index Fund 5.9%
  • Vanguard Target Retirement
    • Initial Investment:
    • $3,000 in IRA or non-IRA
    • Subsequent Investment:
    • $100 or $50 w/ AIP
  • T. Rowe Price Target Date
    • Inception date: 2005
      • underlying funds have much longer track record
    • Expense Ratio: 0.76%
    • 11% return since inception
    • Expect 8-10% returns over long run
  • T. Rowe Price Target Date
    • Initial Investment:
      • $2,500 non-IRA
      • $1,000 in IRA
    • Subsequent Investment:
      • $100 or $50 w/ AIP
  • Vanguard Total Stock Market Index
    • Objective – Track the MSCI index of all U.S. stocks
    • Minimum initial investment = $3,000
    • Minimum Subsequent =$100 /$50 (AIP)
    • 0.19% Expense Ratio
    • 8.92% Average return for 10 years
  • Vanguard Total Stock Market Index
    • Asset Allocation
      • Stocks 98.3%
      • Cash 1.0%
      • Other 0.7%
    • Suitable for long term investors seeking maximum returns & willing to endure market volatility
      • Remember 2000-2003?
  • Homestead Value Fund
    • Actively managed
  • Objectives
    • Low Volatility
      • Diversification
      • Low Turnover (13%)
      • Hold stocks for average of 10 years
    • Low Risk
      • Solid industries and underlying companies
      • Sharpe Ratio of 1.46
  • Investment Requirements
    • Amazing!
    • Only $500 for an initial investment, $200 if invested within an IRA
    • No subsequent investment minimums
    • Affordable on any budget!
  • Expense Ratio
    • Ratio is .76%
    • Experts recommend a ratio less than 1.4% Clements,J. (2000). Cutting Through Mutual Fund Clutter. The Wall Street Journal . May 2000. D1
    • NASD Calculations $10,000 initial investment assuming 5% return, 20 years equals expenses of $2,352
    • Use NASD to compare to other fund’s expenses
  • 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
    • Morningstar’s Stars: ****
    • Business Week: B
    • Consumer Reports: 82/100
  • Selling Points
    • Not the end all-only fund you’ll ever need but it’s a great place to get started:
      • Good for long term investors
      • Low investment minimum, can set up subsequent investment minimums to fit your individual budget
      • Management Tenure is 33 years
      • Solid returns which outperform its index (Goal of actively managed funds)
  • Contact Information
    • Homesteadfunds.com
    • Ticker: HOVLX
    • 1-800-258-3030
    • What questions do you have?
  • Focus on the Future
    • “Past performance is no guarantee of future returns.”
    • 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.
    • The only thing you know about the future is the fund’s expense ratio.
  • How to Choose?
    • If you can afford $3,000 investment
      • Vanguard Total Stock Market Index
        • Own a representative sample of all publicly traded U.S. stocks (with low expenses)
      • Vanguard Target Retirement Fund
        • Widely diversified investment classes (stocks & bonds)
        • Less volatile than 100% stocks
        • Rebalances automatically as you approach retirement
    • To start with low initial investment $50 AIP
      • T. Rowe Price Target Date Retirement Fund
    • Have $200? Don’t want to commit to AIP?
      • Homestead Value
  • How to open an IRA
    • Simple process
      • Online
      • Call and get forms in mail
  • How Does Your IRA Compare?
    • Want to transfer to one of our recommendations?
  • It’s not magic, just do your homework