Mutual Funds for Long Term Goals (IRAs) - PowerPoint PPT Presentation

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Mutual Funds for Long Term Goals (IRAs)

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How to choose a mutual fund Specific MF recommendations based on students research Why Stocks for the Long Run? – PowerPoint PPT presentation

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Title: Mutual Funds for Long Term Goals (IRAs)


1
Mutual 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

2
Summer 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

3
Overview
  • 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)
5
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

6
Individual 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  • When is withdrawn in retirement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

7
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  • is taxed when withdrawn at retirement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 tax-deductible
  • is not taxed when withdrawn at retirement
  • Do not have to start withdrawals at age 70 ½
  • Can bequeath to heirs

8
Questions?
9
What 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

10
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

11
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

12
Index 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

13
How 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

14
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)

15
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.

16
MF 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

17
Expense 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

18
Questions?
19
Funds Chosen by Adv. FF Class
  • Index
  • Vanguard Total Stock Market Index
  • Target Retirement Date
  • Vanguard 2045 Fund
  • T. Rowe Price
  • Actively managed
  • Homestead Value

20
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 funds from same family
  • U.S. international stocks bonds

21
Target Date Retirement
22
Vanguard 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

23
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
  • 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

24
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

25
Vanguard Target Retirement
  • Initial Investment
  • 3,000 in IRA or non-IRA
  • Subsequent Investment
  • 100 or 50 w/ AIP

26
T. 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

27
T. Rowe Price Target Date
  • Initial Investment
  • 2,500 non-IRA
  • 1,000 in IRA
  • Subsequent Investment
  • 100 or 50 w/ AIP

28
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

29
Vanguard 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?

30
Homestead Value Fund
  • Actively managed

31
Objectives
  • 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

32
Investment Requirements
  • Amazing!
  • Only 500 for an initial investment, 200 if
    invested within an IRA
  • No subsequent investment minimums
  • Affordable on any budget!

33
Expense 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

34
Historical Returns
3 year 5 year 10 year
Homestead 14.46 10.85 9.94
SP 500 Index 10.44 6.19 8.42
35
Rating Systems
  • Morningstars Stars
  • Business Week B
  • Consumer Reports 82/100

36
Selling 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)

37
Contact Information
  • Homesteadfunds.com
  • Ticker HOVLX
  • 1-800-258-3030
  • What questions do you have?

38
Focus 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.

39
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 Target Date Retirement Fund
  • Have 200? Dont want to commit to AIP?
  • Homestead Value

40
How to open an IRA
  • Simple process
  • Online
  • Call and get forms in mail

41
How Does Your IRA Compare?
  • Want to transfer to one of our recommendations?

42
Its not magic, just do your homework
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