Stock Mutual Funds forLong Term Goals

Financial Planning for WomenJean Lown, FCHD Dept., USUPowerPoint by Tiffany Smith

Students from the Advanced Family Finance Class

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Why Stocks for the Long Run?

Higher risk = higher potential returnsHistoric average annual rates of return

StocksSmall companies 12%Large companies 10%

Bonds 6%Cash equivalents 3%

Inflation averages 3.1%/year

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What is a Mutual Fund? A company that pools money from many investors to buy a variety of different securities (stocks, bonds, etc.)Each investor owns a pro-rata share of the portfolio Professional managementAutomatic diversification

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Why Mutual Funds? Diversification

Own a piece of many companiesFor a small $ amount you gain a great deal of diversification in your portfolio.

Easy to match your investment objectiveConvenient to purchase and sell

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Mutual Fund CostsALL mutual funds charge management fees

Expressed as a % of fund assetsNOT charged directly to each investor but subtracted from fund assets before gains are distributed to investors

Compare Expense Ratios (%)Lower is better

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Load vs. No-LoadLoad funds charge commissions

~5% of the amount you invest

Financial sales persons sell load fundsNo-load (no commission) funds

Sold directly to investorweb sites800 phone numbermail

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Criteria for Choosing a Stock Mutual Fund

Investment ObjectiveRisks & VolatilityDiversification: more is betterExpenses Minimum Initial/Subsequent Investment

Automatic investment plan

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Focus on the Future“Past performance is no guarantee of future returns.”It’s very difficult to beat “the market” in any one year and even harder to do this consistently. The only thing you know about the future is the expense ratio.

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Index vs. Actively Managed Funds

IndexManagement Fees are lower.Low turnover rate10%-12% or slightly lower return on investments depending on which index

Actively ManagedHigher management fees.Higher turnover rateRate of return can be higher but it is uncommon for it to be higher than an index for long periods of time

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Common Stock IndexesS & P 500- 500 largest U.S. companiesWilshire 5000 – all U.S. publicly traded corporations from small to large

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Individual Retirement Accounts

Tax-advantaged investingInterest earned on the account is not taxed while it is growing for retirementWhen withdrawn it may or may not be taxed depending on whether it is a Traditional or Roth IRA

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Roth IRA Contributions are non-deductibleGrows tax freeIs not taxed when withdrawn at retirement.

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Investment ObjectiveIs the objective of the fund Income or Growth?For long term investing Growth is the better choice.Income funds are mostly based in bonds that provide a cash return and a lower interest rate.

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Initial/Subsequent Investment

Most funds have a large initial hurdle to overcome to get started.Lower subsequent investments once in the door.

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ExpensesFunds charge investors fees and expenses. A fund with high costs must perform better than a low-cost fund to generate the same returns for you.Even small differences in fees can translate into large differences in returns over time.

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Expense Exampleif you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with $60,858 – an 18% difference.

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TurnoverTurnover ratio: measures how long a fund

holds on to the stocks it buys. If a mutual fund trades often, it will have a high turnover ratio. It is better to have a lower turnover rate since every time it buys and sells, the stock incurs cost and the more cost, the higher the capital gains will be taxed.

Bottom line: the lower the turnover rate the better.

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SEC Cost Calculatorhttp://www.sec.gov/

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Funds Chosen by Adv. FF Class

IndexVanguard 500 IndexVanguard Total Stock Market IndexT. Rowe Price Equity Index

Actively managedHomestead ValueMairs & Power

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Vanguard 500 IndexObjective – Track the S&P 500 index large-cap stocks$1,000 Initial Investment / $100 subsequent / $50 (AIP)0.18% Expense Ratio10.72% Return for the last 10 yearsSEC Cost: $2,380.93

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Vanguard Total Stock Market Index

Objective – Track the Wilshire 5000 index of all U.S. stocks$1,000 Initial Investment / $100 subsequent / $50 (AIP)0.19% Expense Ratio10.48% Return for the last 10 yearsSEC Cost: $2,510.83

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T. Rowe Price Equity IndexObjective: To match the performance of the Standard & Poors 500® Stock Index. IRA AIP: Sign up for $50/month & waive the $1,000 initial minimum0.35% Expense Ratio9.95% Return for the last 10 yearsSEC Cost: $4,555.91

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Homestead ValueObjective – Seeks capital growth over the long term and, secondarily, income$200 Initial Investment /no minimum subsequent0.82% Expense Ratio11.03% Return for the last 10 yearsSEC Cost: $10,214.47

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Mairs & Power GrowthObjective – diversified holding of common stocks; above-average long-term appreciation$1,000 Initial Investment / $100 subsequent0.75% Expense Ratio16.51% Return for the last 10 yearsSEC Cost: $9,403.60

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How to Choose? If you can afford $1,000 investment

Vanguard Total Stock Market IndexOwn a piece of all the publicly traded U.S. companies with low expenses

To start with low minimum: Homestead Value $200/$0T. Rowe Price Equity Index $50 AIP

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Don’t Wait. Start Today!Handout: call the 800# and ask for prospectus or on-lineFill out the forms and mail today!One more decision

Name your beneficiary