Transcript Mutual Funds - Utah State University

Summer FPW
• June 11: Long Term Care Insurance
• July 9: Everything you need to know
about credit, credit bureaus & credit
scores
• August 13: Property insurance for
home and vehicles
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Mutual Funds for
IRAs
Financial Planning for Women
Students from Advanced Family
Finance Class:
Samantha Nelson
Jordan Aaberg
Andrew Thompson
Overview
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Diversification & asset allocation
Invest in stocks for the long run
IRA review
What is a mutual fund?
Target date retirement funds
Specific TDR-MF recommendations
based on student research
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Asset allocation
• Categories or classes of assets don’t rise
and fall together
– When one category is losing value, others are
gaining
– When US stocks are going down,
International stocks tend to go up
– When stocks are losing value, bonds may
provide a positive return
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Diversify to Reduce Risk
• Market timing doesn’t work
• Invest in a wide variety of asset classes
• Diversify
– Don’t put all your eggs in one basket
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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– When $ is withdrawn in retirement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withdrawn at retirement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withdrawn at retirement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.)
• Professional management
• Each investor owns a pro-rata share of all
investments in the portfolio
• Fund charges an annual % of assets
• Taken out before $ distributed to shareholders
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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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How to Choose a Mutual Fund
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Investment Objective
Diversification: more is better
No-Load (no commission)
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
• FINRA
– http://apps.finra.org/investor_Information/ea/1/
mfetf.aspx
– See examples on handout
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Expense Example
• Invest $10,000 for 20 years in a fund w/ 10%
annual return
• Average expense ratio for stock MFs = 1.5%
– 1.5% expense ratio; grows to $49,725
– 0.5% expense ratio; grows to $60,858
• 18% more!
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Questions?
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Target Date Retirement Funds
• Funds that are constructed to give
investors a diversified portfolio of stocks
and bonds through a one-stop shop.
• Fund of funds
– Composed of other funds from same family
• The target date is the year in which the
investor plans to retire.
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Target Date funds (continued)
• As the fund nears the target date, the
asset allocation automatically becomes
more conservative.
• Example:
– Vanguard Target Retirement Date Funds
» Beginning
87% stock/ 13% bond
» Middle
70% stock/ 30% bond
» End
30% stock/70% bond
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Target Funds Designed For
• Investors who want to take a hands-off
approach to investing.
– But feel confident in their decision
• Why might investors wish to put their
investments on auto pilot?
– What else would you do with your time?
• Family & friends
• Hobbies & activities
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Advantages
• Simple
• Based on sound investment principles
– Asset allocation
– Diversification
– Automatic rebalancing
– Become more conservative as retirement
nears
• Little account maintenance required
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Target Date Retirement
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Funds Chosen by Adv. FF
Class
• Target Retirement Date
– Vanguard Fund
– T. Rowe Price
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Vanguard Target Retirement
Inception date: 2003
– underlying funds have much longer track
record
• Expense Ratio: 0.21%
• 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 71.7%
– European Stock Index Fund 10.1%
– Pacific Stock Index Fund 4.4%
– Emerging Markets Stock Index Fund
3.8%
• Bonds
Total Bond Market Index Fund 10.0%
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Vanguard Target Retirement
• Minimum Initial Investment
$3,000
• Minimum Subsequent Investment:
$100 or $50 w/ AIP
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T. Rowe Price TDR Funds
• Fund Objective
– capital appreciation and current income
• Expense ratio: .74%
• Minimum initial & subsequent investments
– $1,000 Minimum for IRA or $50 under
Automatic Investment Plan
– Min. Subsequent Investments = $100 or
$50/month under AIP
T. R. Price underlying funds
– Growth Stock
– Value Stock
– Equity Index 500
– New Income
– International Stock
– Mid Cap Growth
– International Growth & Income
– Mid-Cap Value
– High-Yield Bond
How to Choose?
• If you can afford $3,000 investment
– Vanguard Target Date Retirement Fund
• Lowest expense ratio = low costs + higher
returns in long run
• To start with low initial investment ($50 AIP)
– T. Rowe Price Target Date Retirement
Fund
• Most important: get started today!
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Questions?
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How to open an IRA
• Simple process
• Read proscectus!
– Online
– www.vanguard.com
– www.troweprice.com
– Call to get forms in mail
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How Does Your IRA Compare?
• Want to transfer to one of our
recommendations?
• Specific forms are on-line
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It’s not magic, just do your homework
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Web sites
• Vanguard
– https://personal.vanguard.com/us/content/Fun
ds/FundsVanguardFundsTargetOverviewJSP.
jsp
• T. Rowe Price
– http://ira.troweprice.com/retirement_funds/?ph
one=6066
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