Title: Mutual Funds for Long Term Goals (IRAs)
1Mutual Funds forLong Term Goals (IRAs)
- Financial Planning for Women
- PowerPoint by Tiffany Smith
- Students from Advanced Family Finance Class
- Christine Ballard, AddieAnn Hancock, Danielle
Walker, Jodi Miller
2Summer FPW
- June 13 Estate Planning. Rock Allen, attorney
- July 11 Five Timeless Principles of Investing.
Jeff Salisbury, fee-only investment advisor - August 8 Choosing and Working with a Financial
Advisor. Allen Marler, CFP
3Overview
- 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
4(No Transcript)
5Why 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
6Individual 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- When is withdrawn in retirement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
7Traditional 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- is taxed when withdrawn at retirement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 tax-deductible
- is not taxed when withdrawn at retirement
- Do not have to start withdrawals at age 70 ½
- Can bequeath to heirs
8Questions?
9What is a Mutual Fund?
- A company that pools money from many investors to
buy a wide variety of securities (stocks, bonds,
etc.) - Automatic diversification
- Each investor owns a pro-rata share of all
investments in the portfolio - Professional management
10Why 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
11Load 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
12Index vs. Actively Managed Funds
- Index
- Tracks a market index
- SP 500
- DJ Wilshire 5000
- Fees are low
- Low turnover rate
- Investment returns mirror the index
- Actively Managed
- Higher management fees
- Higher turnover rate
- it is uncommon for the return to be higher than
its index for extended periods
13How to Choose a Mutual Fund
- Investment Objective
- Diversification more is better
- No-Load
- Low expense ratio
- Minimum Initial/Subsequent Investment
- Automatic investment plan
- Independent ratings
14Initial/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)
15Expenses/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.
16MF Expense Analyzer
- Compares cost of owning a fund over time based on
the funds expense ratio - National Association of Securities Dealers (NASD)
- Compare 3 funds at a time
- http//apps.nasd.com/investor_Information/ea/nasd/
mfetf.aspx
17Expense Example
- Invest 10,000 for 20 years in a fund w/ 10
annual return - 1.5 expense ratio grows to 49,725
- 0.5 expense ratio grows to 60,858
- 18 more!
- Average expense ratio for stock MFs 1.5
- Index funds charge very low expenses
18Questions?
19Funds Chosen by Adv. FF Class
- Index
- Vanguard Total Stock Market Index
- Target Retirement Date
- Vanguard 2045 Fund
- T. Rowe Price
- Actively managed
- Homestead Value
20Target 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 funds from same family
- U.S. international stocks bonds
21Target Date Retirement
22Vanguard Target Retirement
- Inception date 2003
- underlying funds have much longer track record
- Expense Ratio 0.21
- 12 return since inception
- Expect 8-10 returns over long run
23Target 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
- 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
24Underlying 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
25Vanguard Target Retirement
- Initial Investment
- 3,000 in IRA or non-IRA
- Subsequent Investment
- 100 or 50 w/ AIP
26T. Rowe Price Target Date
- Inception date 2005
- underlying funds have much longer track record
- Expense Ratio 0.76
- 11 return since inception
- Expect 8-10 returns over long run
27T. Rowe Price Target Date
- Initial Investment
- 2,500 non-IRA
- 1,000 in IRA
- Subsequent Investment
- 100 or 50 w/ AIP
28Vanguard 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
29Vanguard Total Stock Market Index
- Asset Allocation
- 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?
30Homestead Value Fund
31Objectives
- Low Volatility
- Diversification
- Low Turnover (13)
- Hold stocks for average of 10 years
- Low Risk
- Solid industries and underlying companies
- Sharpe Ratio of 1.46
32Investment Requirements
- Amazing!
- Only 500 for an initial investment, 200 if
invested within an IRA - No subsequent investment minimums
- Affordable on any budget!
33Expense Ratio
- Ratio is .76
- Experts recommend a ratio less than 1.4
Clements,J. (2000). Cutting Through Mutual Fund
Clutter. The Wall Street Journal. May 2000. D1 - NASD Calculations 10,000 initial investment
assuming 5 return, 20 years equals expenses of
2,352 - Use NASD to compare to other funds expenses
34Historical Returns
3 year 5 year 10 year
Homestead 14.46 10.85 9.94
SP 500 Index 10.44 6.19 8.42
35Rating Systems
- Morningstars Stars
- Business Week B
- Consumer Reports 82/100
36Selling Points
- Not the end all-only fund youll ever need but
its a great place to get started - Good for long term investors
- Low investment minimum, can set up subsequent
investment minimums to fit your individual budget - Management Tenure is 33 years
- Solid returns which outperform its index (Goal of
actively managed funds)
37Contact Information
- Homesteadfunds.com
- Ticker HOVLX
- 1-800-258-3030
- What questions do you have?
38Focus on the Future
- Past performance is no guarantee of future
returns. - Its very difficult to beat the market
(represented by an index such as SP 500) in any
one year and even harder to do this consistently.
- The only thing you know about the future is the
funds expense ratio.
39How 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 Target Date Retirement Fund
- Have 200? Dont want to commit to AIP?
- Homestead Value
40How to open an IRA
- Simple process
- Online
- Call and get forms in mail
41How Does Your IRA Compare?
- Want to transfer to one of our recommendations?
42Its not magic, just do your homework