Index or Managed FundIndex or Managed Fund

Presentation byPresentation by

Kerri MillsKerri Mills

9/10/20029/10/2002

Problem InfoProblem Info

58 year old , retiring in 4 years58 year old , retiring in 4 years

$600,000 in company 403(b) plan$600,000 in company 403(b) plan– Invested in Fidelity MagellanInvested in Fidelity Magellan

Recently switched to VanguardRecently switched to Vanguard– 500 index fund500 index fund

$150,000 in various individual stocks, $150,000 in various individual stocks, owns home, and no debtowns home, and no debt

403(b)403(b)

Tax-sheltered retirement plans available to Tax-sheltered retirement plans available to employees of government agencies and employees of government agencies and non-profit organizations such as hospitals non-profit organizations such as hospitals and universities. A 403(b) account is and universities. A 403(b) account is established by an individual and is similar established by an individual and is similar to an individual retirement account (IRA)to an individual retirement account (IRA)

Index FundsIndex FundsUses an investment approach that seeks to track Uses an investment approach that seeks to track the investment returns of a specified stock or bond the investment returns of a specified stock or bond market benchmark, or indexmarket benchmark, or index

Low cost is a key advantage of index funds Low cost is a key advantage of index funds – Pays only minimal advisory feesPays only minimal advisory fees– Keeps operating expenses at the lowest possible levelKeeps operating expenses at the lowest possible level– Keeps portfolio transaction costs at minimal levelKeeps portfolio transaction costs at minimal level

Investors can implement a wide range of Investors can implement a wide range of distinctive investment strategies through indexingdistinctive investment strategies through indexing

Managed FundsManaged Funds

A unit trust which allows investors to pool A unit trust which allows investors to pool their money with that of other investors so their money with that of other investors so that the fund can buy a wide range of that the fund can buy a wide range of investmentsinvestments

Managed by a professional fund manager Managed by a professional fund manager who makes the investment decisionswho makes the investment decisions

Compare FundsCompare Funds(Average Annual Total Return)(Average Annual Total Return)

Fidelity MagellanFidelity Magellan

-21.20%-21.20%

-24.70%-24.70%

-10.68%-10.68%

9.95%9.95%

Vanguard 500 IndexVanguard 500 Index

-19.93%-19.93%

-23.68%-23.68%

-10.67%-10.67%

10.01%10.01%

Year to Date

1 Year

3 Years

10 Years

As of 7/31/2002 based on figures from www.morningstar.com

Compare FundsCompare Funds

SimilarSimilar– Price/Earnings RatioPrice/Earnings Ratio– Price/Book RatioPrice/Book Ratio– Earning Growth RateEarning Growth Rate

Advantage VanguardAdvantage Vanguard– Return on EquityReturn on Equity– Less feesLess fees

Advantage MagellanAdvantage Magellan– Rough Proxy for the Vanguard 500 IndexRough Proxy for the Vanguard 500 Index

Fees and ExpensesFees and Expenses

Fidelity MagellanFidelity Magellan

0.88%0.88%

NoneNone

$35$35

3% Sales Charge3% Sales Charge

NoneNone

Vanguard 500 IndexVanguard 500 Index

0.18%0.18%

NoneNone

NoneNone

NoneNone

NoneNone

Expense Ratio

12b-1 Fee

Transaction Fee

Purchase Fee

Redemption Fee

SolutionSolution

Overall, the Vanguard 500 Index is the Overall, the Vanguard 500 Index is the better optionbetter option– Considering ageConsidering age– Risk involvedRisk involved– Fees assessedFees assessed– Amount of return on investmentAmount of return on investment