Stock Mutual Funds for Long Term Goals

Stock Mutual Funds forLong Term Goals Financial Planning for Women Jean Lown, FCHD Dept., USU PowerPoint by Tiffany Smith Students from the Advanced Family Finance Class

Why Stocks for the Long Run? • Higher risk = higher potential returns • Historic average annual rates of return • Stocks • Small companies 12% • Large companies 10% • Bonds 6% • Cash equivalents 3% • Inflation averages 3.1%/year

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 management • Automatic diversification

Why Mutual Funds? • Diversification • Own a piece of many companies • For a small $ amount you gain a great deal of diversification in your portfolio. • Easy to match your investment objective • Convenient to purchase and sell

Mutual Fund Costs • ALL mutual funds charge management fees • Expressed as a % of fund assets • NOT charged directly to each investor but subtracted from fund assets before gains are distributed to investors • Compare Expense Ratios (%) • Lower is better

Load vs. No-Load • Load funds charge commissions • ~5% of the amount you invest • Financial sales persons sell load funds • No-load (no commission) funds • Sold directly to investor • web sites • 800 phone number • mail

Criteria for Choosing a Stock Mutual Fund • Investment Objective • Risks & Volatility • Diversification: more is better • Expenses • Minimum Initial/Subsequent Investment • Automatic investment plan

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.

Index Management Fees are lower. Low turnover rate 10%-12% or slightly lower return on investments depending on which index Actively Managed Higher management fees. Higher turnover rate Rate of return can be higher but it is uncommon for it to be higher than an index for long periods of time Index vs. Actively Managed Funds

Common Stock Indexes • S & P 500- 500 largest U.S. companies • Wilshire 5000 – all U.S. publicly traded corporations from small to large

Individual Retirement Accounts • Tax-advantaged investing • Interest earned on the account is not taxed while it is growing for retirement • When withdrawn it may or may not be taxed depending on whether it is a Traditional or Roth IRA

Roth IRA • Contributions are non-deductible • Grows tax free • Is not taxed when withdrawn at retirement.

Investment Objective • Is 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.

Initial/Subsequent Investment • Most funds have a large initial hurdle to overcome to get started. • Lower subsequent investments once in the door.

Expenses • Funds 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.

Expense Example • if 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.

Turnover Turnover 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.

SEC Cost Calculator • http://www.sec.gov/

Index Vanguard 500 Index Vanguard Total Stock Market Index T. Rowe Price Equity Index Actively managed Homestead Value Mairs & Power Funds Chosen by Adv. FF Class

Vanguard 500 Index • Objective – Track the S&P 500 index large-cap stocks • $1,000 Initial Investment / $100 subsequent / $50 (AIP) • 0.18% Expense Ratio • 10.72% Return for the last 10 years • SEC Cost: $2,380.93

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 Ratio • 10.48% Return for the last 10 years • SEC Cost: $2,510.83

T. Rowe Price Equity Index • Objective: To match the performance of the Standard & Poors 500® Stock Index. • IRA AIP: Sign up for $50/month & waive the $1,000 initial minimum • 0.35% Expense Ratio • 9.95% Return for the last 10 years • SEC Cost: $4,555.91

Homestead Value • Objective – Seeks capital growth over the long term and, secondarily, income • $200 Initial Investment /no minimum subsequent • 0.82% Expense Ratio • 11.03% Return for the last 10 years • SEC Cost: $10,214.47

Mairs & Power Growth • Objective – diversified holding of common stocks; above-average long-term appreciation • $1,000 Initial Investment / $100 subsequent • 0.75% Expense Ratio • 16.51% Return for the last 10 years • SEC Cost: $9,403.60

How to Choose? • If you can afford $1,000 investment • Vanguard Total Stock Market Index • Own a piece of all the publicly traded U.S. companies with low expenses • To start with low minimum: • Homestead Value $200/$0 • T. Rowe Price Equity Index $50 AIP

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

Stock Mutual Funds for Long Term Goals