1. Mutual Funds for Long 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When withdrawn, $ may or may not be taxed depending on whether it is a Traditional or Roth IRA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. 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$ is taxed when withdrawn at retirement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$ is not taxed when withdrawn at retirement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

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 vs. Actively Managed Funds
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

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)

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

19. Blue Chip Growth Fund TRBCX Money 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
Assuming a 20 year investment term of $10,000

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 ?

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