Mutual Funds For Novices
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Transcript of Mutual Funds For Novices
18 � (((b))) magazine | s u m m e r 2 0 0 8
WWEE AALLLL LLIIKKEE CCHHOOIICCEESS, but when faced with
more than 8,000i mutual funds, taking a dart to
the newspaper’s financial section can begin to
seem like a logical selection technique.
But wait; there is a better way. Let’s peel back
the layers of mystery and start at the core of
importance: the objective of the fund. Every fund
must state the type of stocks or bonds in which it
is investing and their concentration. For example,
a U.S. Large Company fund will be searching for
those big companies based in the United States
with capitalizations over $60 billion. A balanced
fund will invest in a blend of perhaps 60 percent
stocks and 40 percent bonds. There are
international funds, which invest outside the
United States, and global funds, which are
worldwide. Select the fund with the objective that
helps to diversify your portfolio.
You do not manage the fund yourself; you are
hiring managers to do this for you. For myself, I
want the most experienced managers I can find,
preferably with a long track record on the fund in
which I am interested. And I don’t want to pay
too much for them.
Every fund has expenses. Every one. Even the
index funds. If you don’t know what these
expenses are, you could be paying too much for
your fund. These expenses are deducted from the
investment results, which means that in years of
low returns, the fund company is reaching into
mutualfundsfornovices
WRITTEN BY RRoossee MM.. AAnnddeerrssoonn,, CCFFPP®®
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your pocket to pay their fees. I like to keep my
investment results in my account and the best
way I know to do that is to keep the expenses
very low. I’m not a fanatic about it. If there is a
management team that I would like to have
manage money for me and they cost a little bit
more, then all right, so long as the emphasis is
on ‘little.’
Everybody likes to buy a fund based on its
return history. But you can’t simply because it is
history. This history serves as a gauge to
measure the manager against the fund’s
benchmark, assuming the manager hasn’t
changed. If you have a new manager, you really
have no track record for that fund with that
manager.
So, where can you find all these informative
pieces of data for the mutual funds? The
prospectus is the one source that holds it all.
Most mutual funds now have the prospectuses
available online. Yes, it is worth the time to read
through it. You will find a 10-year return history
of the fund. You will be able to read the
objective and decide if you are comfortable with
what it describes. The expenses will be spelled
out in detail. This expense area will also detail
whether there is a front-end sales charge or a
back-end charge. A sales charge is not a bad
thing, but you should know about these charges
in advance so you can make the decision to buy
the fund knowing all of the variables.
A sales charge is nothing more than the fee
to the advisor for the direction and advice given
to you. There are ways to reduce this sales
charge and it’s all spelled out in the prospectus.
There is still a big debate over paying the
sales charges: load vs. no-load. It’s up to the
individual to decide if you have the time and the
tools to dig into the nuances of a mutual fund
and decide if it’s right for your investment
portfolio. It takes time and patience. An
alternative is to seek professional guidance.
But you should expect to pay for this advice.
Briefly, there are three ways to pay: fee-for-
service, which is typically by the hour; a
commission; or an asset-based fee.
My preference is to pay the hourly rate on
the fee-for-service basis, but you must have
follow-through. In my experience, some people
get to a certain point and then get busy and
never accomplish their goals. So for many
people, this option won’t work well.
My second preference is to pay the
commission. It’s very straightforward and a one-
time payment on your investment. You know how
much it is before you agree to the investment. If
you don’t understand it, keep asking questions
until you do understand what you’re spending.
My least favorite method of paying for advice
is the asset-based fee. Over time, this will be the
most expensive way for you to invest.
One last caveat: you should take a look at
your investments once a year. Do the objectives
still feel comfortable to you? What has changed
in your life? If you are working with a
professional, you should schedule a review at
least once a year and whenever a major life
event takes place. This doesn’t mean to start
over with new funds, but maybe rebalance or
add to an IRA. Investing is fun and mutual
funds are the most efficient way to invest. I hope
you enjoy it!
Tip: Check out the investment glossary of the
American Association of Individual Investors
(AAII) at www.aaii.com/glossary. )) )) ))
Rose M. Anderson, CFP®, is the owner of
Anderson Financial, Inc. and Pure Gallery, Inc.
www.PureGallery.net. [email protected].
i Per Chicago’s Morningstar, Inc. as of February 2008.
The information contained in this article is for information purposes
and is not to be considered as financial, tax, or legal advice. As with
any financial or legal matter, consult your qualified securities, tax, or
legal advisor before taking action.
s u m m e r 2 0 0 8 | (((b))) magazine � 19
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Let’s
peel back
the layers of
mystery and
start at the
core of
importance:
the
objective of
the fund.
“
”
20 � (((b))) magazine | s u m m e r 2 0 0 8
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MMuuttuuaall FFuunndd – A fund operated by an
investment company that raises
money from shareholders and invests
it in stocks, bonds, options, futures,
currencies, or money market
securities. These funds offer investors
the advantages of diversification and
professional management. Funds
levy fees for this management as well
as 12b-1 fees, exchange fees, and
other administrative charges.
All shareholders share equally in
the gains and losses generated by
the fund.
LLooaadd FFuunndd – A fund sold through
a broker.
NNoo--LLooaadd FFuunndd – A fund sold directly to
investors.
AAllpphhaa – In the case of a mutual fund, the
alpha measures the relationship
between the fund’s performance and
its beta over a three-year period.
BBeettaa – The coefficient measuring the
fund’s relative volatility. The beta is
the covariance of the fund in relation
to the rest of the stock market. The
S&P 500 Stock Index has a beta
coefficient of 1. A fund with a higher
beta is more volatile than the market,
and any fund with a lower beta can be
expected to rise and fall more slowly
than the market.
SSttaannddaarrdd DDeevviiaattiioonn – The statistical
measure of the degree to which an
individual value in a probability
distribution tends to vary from the
mean. The greater the degree of
dispersion, the greater the risk.
MMaarrkkeett VVaalluuee oorr MMaarrkkeett CCaappiittaalliizzaattiioonn –
Number of shares outstanding
multiplied by stock price.
OObbjjeeccttiivvee ––
LLaarrggee CCaapp –– Typically contains
companies with at least $5 billion in
outstanding market value.
SSmmaallll CCaapp – Typically contains
companies with $500 million or less
in market value.
MMiidd--CCaapp – Contains companies with a
market value in between small and
large.
MMiiccrroo--CCaapp – Those companies under
$50 million in market value.
GGrroowwtthh – Funds that emphasize
companies that have exhibited faster-
than-average gains in earnings over
the last few years and are expected to
continue these high levels of profit
growth.
VVaalluuee – Funds that emphasize
companies that have not shown
growth or profits but where the fund
managers expect this to change. By
buying at the current lower prices, the
managers expect bigger fund gains
when the market recognizes the
opportunities in these companies.
Keep in mind that these opportunities
may never be recognized and the
prices of some individual holdings
may stagnate.
UU..SS.. FFuunnddss – Concentrates on
companies based in the United States.
IInntteerrnnaattiioonnaall FFuunnddss – Concentrates in
companies outside the United States.
GGlloobbaall FFuunnddss – The fund managers
can find opportunities for investment
anywhere in the world.
IInnddeexx FFuunndd – That which follows a
benchmark or index. The investment
results will most likely trail the
benchmark by the amount of the
fund’s expenses.
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s u m m e r 2 0 0 8 | (((b))) magazine � 21
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Jeanne A. Connelly, RFP
Cambium Group LLC
1869 Charter Lane, Suite 203
Lancaster PA 17601
717-299-9450
Jeanne A. Connelly, Registered Representative and Financial Advisor,
Park Avenue Securities LLC (PAS). 1869 Charter Lane, Suite 201,
Lancaster PA 17601. Securities products/services and advisory
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