Transcript Mutual Funds - Utah State University

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
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Overview
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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
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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
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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– When $ is withdrawn in retirement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
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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withdrawn at retirement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 taxdeductible
• $ is not taxed when
withdrawn at retirement
• Do not have to start
withdrawals at age 70 ½
• Can bequeath to heirs
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Questions?
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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
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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
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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
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Index vs. Actively Managed Funds
Index
Actively Managed
• Tracks a market index • Higher management
fees
– S&P 500
– DJ Wilshire 5000
• Higher turnover rate
• Fees are low
• it is uncommon for the
return to be higher than
• Low turnover rate
its index for extended
• Investment returns
periods
mirror the index
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How to Choose a Mutual Fund
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Investment Objective
Diversification: more is better
No-Load
Low expense ratio
Minimum Initial/Subsequent Investment
– Automatic investment plan
• Independent ratings
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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)
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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.
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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
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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
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Questions?
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Funds Chosen by Adv. FF Class
• Index
– Vanguard Total Stock
Market Index
• Actively managed
– Homestead Value
• Target Retirement
Date
– Vanguard 2045 Fund
– T. Rowe Price
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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
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Target Date Retirement
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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
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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:
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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
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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%
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Vanguard Target Retirement
• Initial Investment:
$3,000 in IRA or non-IRA
• Subsequent Investment:
$100 or $50 w/ AIP
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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
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T. Rowe Price Target Date
• Initial Investment:
– $2,500 non-IRA
– $1,000 in IRA
• Subsequent Investment:
– $100 or $50 w/ AIP
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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
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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?
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Homestead Value Fund
• Actively managed
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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
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Investment Requirements
• Amazing!
• Only $500 for an initial investment, $200 if
invested within an IRA
• No subsequent investment minimums
• Affordable on any budget!
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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
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Historical Returns
3 year
5 year
10 year
Homestead 14.46%
10.85%
9.94%
S&P 500
Index
6.19%
8.42%
10.44%
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Rating Systems
• Morningstar’s Stars: ****
• Business Week: B
• Consumer Reports: 82/100
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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)
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Contact Information
• Homesteadfunds.com
• Ticker: HOVLX
• 1-800-258-3030
• What questions do you have?
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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.
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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
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How to open an IRA
• Simple process
– Online
– Call and get forms in mail
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How Does Your IRA Compare?
• Want to transfer to one of our
recommendations?
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It’s not magic, just do your homework
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