Mutual Funds for Long Term Goals (IRAs )

1. Mutual Funds forLong 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

2. 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

3. 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

4. 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Retirement Accounts • Tax-advantaged investing • the account is not taxed while it is growing for retirement • When withdrawn, $ may or may not be taxed depending on whether it is a Traditional or Roth IRA

5. Contributions may be tax-deductible Depends on income & employer sponsored plan $ is taxed when withdrawn at retirement Must start withdrawals at 70 ½ (spend during lifetime) Contributions are not tax-deductible $ is not taxed when withdrawn at retirement Do not have to start withdrawals at age 70 ½ Can bequeath to heirs Traditional Vs. Roth IRA

6. Questions?

7. 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

8. 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

9. 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

10. Index Tracks a market index S&P 500 DJ Wilshire 5000 Fees are lower Low turnover rate Investment returns mirror the 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

11. Criteria for Choosing a Mutual Fund • Investment Objective • Diversification: more is better • No-Loads • Low expense ratio • Minimum Initial/Subsequent Investment • Automatic investment plan • Independent ratings

12. 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)

13. 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.

14. 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

15. 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%

16. 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.

17. Questions?

18. Index Vanguard Total Stock Market Index Target Retirement Date Vanguard 2045 Fund Actively managed Meridian Value T. Rowe Price Blue Chip Growth Funds Chosen by Adv. FF Class

19. Blue Chip Growth FundTRBCXMoney Magazine 65 Best Funds

20. TRBCX Asset Allocation • Stocks 99.4% • Cash 0.6%

21. 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

22. TRBCX Ratings • High ranking among independent raters • Morningstar • Kiplinger's: • Forbes Rating: B • Money Magazine: Top 65 Funds

23. Meridian Value Fund (1994) • 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

24. Meridian Value Fund

25. Meridian Value Fund (MVALX) Morningstar Rated #1 for past 10 years by Lipper Equity Fund Analysis (through Dec. 2005) Business Week + Money 65 low-cost, well-managed, diversified funds

26. 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

27. 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?

28. 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

29. Vanguard Target Retirement

30. Vanguard Target Retirement Inception date: 2003 • underlying funds have much longer track record • Expense Ratio: 0.21% • 12.87% return since inception

31. 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%

32. 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

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

34. 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

35. It’s not magic, just do your homework