Why Stocks for the Long Run?
Individual Retirement Accounts
* Tax-advantaged investing
o the account is not taxed while it is growing for retirement
o When withdrawn, $ may or may not be taxed depending on whether it is a Traditional or Roth IRA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
o 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* $ is taxed when withdrawn at retirement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* $ is not taxed when withdrawn at retirement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
o Each investor owns a pro-rata share of all investments in the portfolio
* Professional management
8
Why Mutual Funds?
* Diversification
o Own a piece of many companies
o For a small $ amount you gain a great deal of diversification.
* Easy to match your investment objective
* Convenient to purchase and sel
9
Load vs. No-Load
* Load funds are sold by financial sales people who charge commissions
o ~5% of every $, every time you invest
* No-load (no commission) funds
o Sold directly to investor (no salesperson)
+ web sites
+ 800 phone number
+ mail
10
Index vs. Actively Managed Funds
Index
* Tracks a market index
o S&P 500
o 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
o 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
o 0.5% expense ratio; grows to $60,858
o 1.5% expense ratio; grows to $49,725
+ 18% more!
o 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
o Vanguard Total Stock Market Index
* Target Retirement Date
o Vanguard 2045 Fund
* Actively managed
o Meridian Value
o 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
o Morningstar
o Kiplinger's:
o Forbes Rating: B
o 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 year
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
o Stocks 98.3%
o Cash 1.0%
o Other 0.7%
* Suitable for long term investors seeking maximum returns & willing to endure market volatility
o Remember 2000-2003?
28
Vanguard Target Retirement Date Funds
* Objective: seek capital appreciation through diversification
o managed according to your stage in life
o become more conservative over time
+ Automatic rebalancing
* Invest in existing Vanguard funds
o U.S. stocks, bonds & international stocks
29
Vanguard Target Retirement
30
Vanguard Target Retirement
Inception date: 2003
o 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
o Total Stock Market Index Fund 70.7%
o European Stock Index Fund 11.8%
o 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
o 94% invested in U.S. & international stocks
* Other funds for earlier retirement dates:
o 2035: 77% stocks/23% bonds
o 2025: 59% stocks/41% bonds
o 2015: 49% stocks/48% bonds/3% inflation-protected
o 2005: 33% stocks/49% bonds/18% inflation-protecte
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
o Vanguard Total Stock Market Index
+ Own a representative sample of all publicly traded U.S. stocks (with low expenses)
o 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
o T. Rowe Price Blue Chip Growth
