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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
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
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
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
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 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
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
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 vs actively managed funds

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
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
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
Roth IRA
  • Contributions are non-deductible
  • Grows tax free
  • Is not taxed when withdrawn at retirement.
investment objective
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
Initial/Subsequent Investment
  • Most funds have a large initial hurdle to overcome to get started.
  • Lower subsequent investments once in the door.
  • 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
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 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
SEC Cost Calculator
funds chosen by adv ff class

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
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
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
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
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
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
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
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