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Getting Started

Getting Started. October 13, 2008. This Week: Getting Started. Choosing a Broker Account Types Investing in Funds Club Portfolio A Look at Core-Mark. Choosing a Broker. What to Look For. (Hidden) Fees Commission Rates Branch Offices vs. Online Customer Service. Broker Comparison.

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Getting Started

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  1. Getting Started October 13, 2008

  2. This Week: Getting Started Choosing a Broker Account Types Investing in Funds Club Portfolio A Look at Core-Mark

  3. Choosing a Broker

  4. What to Look For • (Hidden) Fees • Commission Rates • Branch Offices vs. Online • Customer Service

  5. Broker Comparison • Pay attention to miscellaneous fees, especially those that you are likely to incur. • Pick a broker that fits your needs.

  6. Scottrade • $7 Trades • No inactivity fees • Basic functional interface • Branch offices • Used by many CCIG members • Help with referrals, questions

  7. Placing a Trade • Limit Orders • “This is an order to buy or sell a set number of shares at a specified price or better. A Limit Order guarantees price, but not an execution.”

  8. Account Types • Brokerage • Basic Buying and Selling Stocks, Funds, etc. • Margin, Options • Roth IRA • Post-Tax Retirement Account • Pay Tax Now Instead of Later • Contribute up to $5,000 of Earned Income • IRA • Pre-Tax Retirement Account • Pay Tax on Withdrawal (during retirement)

  9. Questions / Comments

  10. Investing in Funds

  11. What to Look For in Actively Managed Funds • Expense Ratio • Tax Efficiency • Investing Goals and Style • Management Incentives and Interests • Ownership • Fee Structure • Historical Returns • But be careful because historical returns often aren’t indicative of future returns!

  12. Examples of Value-Oriented Funds • Fairholme (FAIRX) • Longleaf Partners (LLPFX) • Sequoia Fund (SEQUX) • Periods of underperformance when value is out of favor. • Relying on the decisions of management.

  13. Exchange Traded Funds (ETFs) • If the ETF tracks an index, you don’t have to worry about tax efficiency, evaluating a manager, but do pay attention to expenses! • “A security that tracks an index, a commodity, or a basket of stocks like an index fund, but trades like a stock on an exchange.” • Pay same commission as a regular trade ($7 at Scottrade, remember to use limit orders). • Buy and sell anytime markets are open.

  14. Keeping ETFs Fairly Priced: Arbitrage • ETFs have an underlying net asset value (NAV). • Depending on supply and demand, the price of an ETF may deviate from its NAV. • When trading at a discount, authorized arbitragers can buy ETF shares and exchange those shares for the underlying securities and sell those securities, or vise-versa if the ETF is trading at a premium. • This keeps the price of the ETF close to its NAV, and thus fairly valued.

  15. Examples of ETFs • Sector-Specific • Country-Specific: EWZ, EWY, FXI • Commodities, Dynamic Indexes • Index Funds: VTI, VEU, VNQ, VWO, IVV, SPY

  16. Simple Indexed ETF Portfolio • 60% VTI – Vanguard Total Stock Market Index, ER 0.07% • 40% VEU – Vanguard FTSE All World Ex-US Index, ER 0.25% • Add bonds later • Weighted ER of 0.14% • Holds Over 5,000 Stocks

  17. Index Mutual Funds • Higher minimums. • Better for small, frequent purchases (DCA). • Avoid trading costs by buying directly. • Only priced and traded at the close of the day. • Vanguard (generally $3,000 minimum).

  18. Morningstar Available via OSU libraries and ccig.osu.edu: http://proxy.lib.ohio-state.edu/login?url=http://library.morningstar.com

  19. Morningstar • Aggregates Fund Data • Expenses • Historical Returns • After-Tax Returns • Holdings • Also Rating System and Analyst Reports • Portfolio X-Ray • Displays data for a portfolio of funds • Sometimes more data than you really need…

  20. Some Related Reading • A Random Walk Down Wall Street by Burton Malkiel • Common Sense on Mutual Funds by Jack Bogle • The Bogleheads’ Guide to Investing • Morningstar’s Guide to Mutual Funds

  21. Summary • Do some research, read one or two books and you will be set. • Weigh the pros and cons of investing in active versus passive funds. • CCIG generally is not focused on investing in funds, but we can point you in the right direction. • Remember that enterprising investors may still choose ETFs for easy and inexpensive exposure to specific industries, countries, etc.

  22. Questions?

  23. Club Portfolio

  24. Goals • Show by realistic example how to choose investments. • Provide a sample portfolio of value investments for a college-aged investor. • Learn about different stocks and companies and what makes them attractive investment opportunities. • Encourage discussion and debate. • Maintain records of the portfolio to learn from mistakes and successes.

  25. Parameters • Start with $20,000 cash. • Trades cost $7 (Scottrade pricing). • Placing a trade requires that a majority of present and voting members approve the transaction. • Provide rationale and analysis (as well as continuing discussion) for each investment on the appropriate forum page.

  26. Analysis • Reason for Buying • Selling Strategy / Expected Duration • Reason for Selling • Analysis (what went well, what didn’t)

  27. ccig.osu.edu October 13, 2008

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