Mutual Funds for
Long Term Goals (IRAs)
Financial Planning for Women
Jean Lown, FCHD Dept., USU
PowerPoint by Tiffany Smith
Students from Advanced Family Finance
Carrie Baugh, Jenny Olsen, Sarah Doxey,
Daneal Francisco, & Natalie Nesbit
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 for
retirement
– When withdrawn, $ may or may not be taxed
depending on whether it is a Traditional or
Roth IRA
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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withdrawn at retirement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withdrawn at retirement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 variety of different
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 lower
• Rate of return can be
higher but it is
• Low turnover rate
uncommon for it to be
• Investment returns
higher than an index for
mirror the index
long periods of time
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Criteria for Choosing a Mutual
Fund
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Investment Objective
Diversification: more is better
No-Loads
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)
• 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
– 0.5% expense ratio; grows to $60,858
– 1.5% expense ratio; grows to $49,725
• 18% more!
– Average expense ratio for stock MFs =
1.5%
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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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Questions?
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Funds Chosen by Adv. FF Class
• Index
– Vanguard Total Stock
Market Index
• Actively managed
– Meridian Value
– T. Rowe Price Blue Chip
Growth
• Target Retirement
Date
– Vanguard 2045 Fund
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Blue Chip Growth Fund
TRBCX
Money Magazine
65 Best Funds
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TRBCX Asset Allocation
• Stocks 99.4%
• Cash 0.6%
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T. Rowe Price Blue Chip Growth
Fund
• Objective: Growth
• IRA AIP: Sign up for $50/month & waive
the $1,000 initial minimum
• 0.61% Expense Ratio
• 8.84% average return for past 10 years
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TRBCX Ratings
• High ranking among independent raters
– Morningstar
– Kiplinger's:
– Forbes Rating: B
– Money Magazine: Top 65 Funds
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Meridian Value Fund (1994)
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Seeks long-term growth of capital
Mid-cap blend
Minimum Initial: $1,000
Subsequent: $50
Expense Ratio: 1.08%
18% return average over 10 years
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Meridian Value Fund
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Meridian Value Fund (MVALX)
Morningstar
Rated #1 for past 10 years by Lipper Equity Fund
Analysis (through Dec. 2005)
Business Week
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Money 65 low-cost, well-managed, diversified funds
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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 of VTSMX
– 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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Vanguard 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 Vanguard funds
– U.S. stocks, bonds & international stocks
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Vanguard Target Retirement
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Vanguard Target Retirement
Inception date: 2003
– underlying funds have much longer track
record
• Expense Ratio: 0.21%
• 12.87% return since inception
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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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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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Vanguard Target Retirement
• Initial Investment:
$3,000 in IRA or non-IRA
• Subsequent Investment:
$100 or $50 w/ AIP
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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 Blue Chip Growth
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It’s not magic, just do your homework
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