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Mutual Funds


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Mutual Funds

  1. 1. 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
  2. 2. 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>
  3. 3. 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>
  4. 4. Individual Retirement Accounts <ul><li>Tax-advantaged investing </li></ul><ul><ul><li>the account is not taxed while it is growing for retirement </li></ul></ul><ul><ul><li>When withdrawn, $ may or may not be taxed depending on whether it is a Traditional or Roth IRA </li></ul></ul>
  5. 5. 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$ is taxed when withdrawn at retirement 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$ is not taxed when withdrawn at retirement 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>
  6. 6. Questions?
  7. 7. What is a Mutual Fund? <ul><li>A company that pools money from many investors to buy a variety of different 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>
  8. 8. 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>
  9. 9. 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>
  10. 10. 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 lower </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>Rate of return can be higher but it is uncommon for it to be higher than an index for long periods of time </li></ul>
  11. 11. Criteria for Choosing a Mutual Fund <ul><li>Investment Objective </li></ul><ul><li>Diversification: more is better </li></ul><ul><li>No-Loads </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>
  12. 12. 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>
  13. 13. 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>
  14. 14. 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>http:// </li></ul>
  15. 15. Expense Example <ul><li>Invest $10,000 for 20 years in a fund w/ 10% annual return </li></ul><ul><ul><li>0.5% expense ratio; grows to $60,858 </li></ul></ul><ul><ul><li>1.5% expense ratio; grows to $49,725 </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>
  16. 16. 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>
  17. 17. Questions?
  18. 18. 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><li>Actively managed </li></ul><ul><ul><li>Meridian Value </li></ul></ul><ul><ul><li>T. Rowe Price Blue Chip Growth </li></ul></ul>
  19. 19. Blue Chip Growth Fund TRBCX Money Magazine 65 Best Funds
  20. 20. TRBCX Asset Allocation <ul><li>Stocks 99.4% </li></ul><ul><li>Cash 0.6% </li></ul>
  21. 21. T. Rowe Price Blue Chip Growth Fund <ul><li>Objective: Growth </li></ul><ul><li>IRA AIP: Sign up for $50/month & waive the $1,000 initial minimum </li></ul><ul><li>0.61% Expense Ratio </li></ul><ul><li>8.84% average return for past 10 years </li></ul>
  22. 22. TRBCX Ratings <ul><li>High ranking among independent raters </li></ul><ul><ul><li>Morningstar </li></ul></ul><ul><ul><li>Kiplinger's: </li></ul></ul><ul><ul><li>Forbes Rating: B </li></ul></ul><ul><ul><li>Money Magazine: Top 65 Funds </li></ul></ul>
  23. 23. Meridian Value Fund (1994) <ul><li>Seeks long-term growth of capital </li></ul><ul><li>Mid-cap blend </li></ul><ul><li>Minimum Initial: $1,000 </li></ul><ul><li>Subsequent: $50 </li></ul><ul><li>Expense Ratio: 1.08% </li></ul><ul><li>18% return average over 10 years </li></ul>
  24. 24. Meridian Value Fund
  25. 25. Meridian Value Fund (MVALX) <ul><li>Morningstar </li></ul><ul><li>Rated #1 for past 10 years by Lipper Equity Fund Analysis (through Dec. 2005) </li></ul><ul><li>Business Week + </li></ul><ul><li>Money 65 low-cost, well-managed, diversified funds </li></ul>
  26. 26. 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>
  27. 27. Vanguard Total Stock Market Index <ul><li>Asset Allocation of VTSMX </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>
  28. 28. Vanguard 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 Vanguard funds </li></ul><ul><ul><li>U.S. stocks, bonds & international stocks </li></ul></ul>
  29. 29. Vanguard Target Retirement
  30. 30. 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>12.87% return since inception </li></ul>
  31. 31. 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>
  32. 32. 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>
  33. 33. 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>
  34. 34. 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 Blue Chip Growth </li></ul></ul>
  35. 35. It’s not magic, just do your homework