Mutual Funds for Long Term Goals (IRAs)

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Mutual Funds forLong Term Goals (IRAs)

• Financial Planning for Women
• PowerPoint by Tiffany Smith
• Students from Advanced Family Finance Class
• Christine Ballard, AddieAnn Hancock, Danielle
  Walker, Jodi Miller

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Summer FPW

• June 13 Estate Planning. Rock Allen, attorney
• July 11 Five Timeless Principles of Investing.
  Jeff Salisbury, fee-only investment advisor
• August 8 Choosing and Working with a Financial
  Advisor. Allen Marler, CFP

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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

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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

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Individual Retirement Accounts

• Tax-advantaged investing
• the account is not taxed while it is growing
• When is withdrawn in retirement
• Traditional IRA withdrawals are taxed
• Roth IRA withdrawals are tax-free

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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• is taxed when withdrawn at retirement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• is not taxed when withdrawn at retirement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

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Questions?
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What is a Mutual Fund?

• A company that pools money from many investors to
  buy a wide variety of securities (stocks, bonds,
  etc.)
• Automatic diversification
• Each investor owns a pro-rata share of all
  investments in the portfolio
• Professional management

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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

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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

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Index vs. Actively Managed Funds

• Index
• Tracks a market index
• SP 500
• DJ Wilshire 5000
• Fees are low
• Low turnover rate
• Investment returns mirror the index

• Actively Managed
• Higher management fees
• Higher turnover rate
• it is uncommon for the return to be higher than
  its index for extended periods

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How to Choose a Mutual Fund

• Investment Objective
• Diversification more is better
• No-Load
• Low expense ratio
• Minimum Initial/Subsequent Investment
• Automatic investment plan
• Independent ratings

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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)

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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.

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MF Expense Analyzer

• Compares cost of owning a fund over time based on
  the funds expense ratio
• National Association of Securities Dealers (NASD)
• Compare 3 funds at a time
• http//apps.nasd.com/investor_Information/ea/nasd/
  mfetf.aspx

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Expense Example

• Invest 10,000 for 20 years in a fund w/ 10
  annual return
• 1.5 expense ratio grows to 49,725
• 0.5 expense ratio grows to 60,858
• 18 more!
• Average expense ratio for stock MFs 1.5
• Index funds charge very low expenses

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Questions?
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Funds Chosen by Adv. FF Class

• Index
• Vanguard Total Stock Market Index
• Target Retirement Date
• Vanguard 2045 Fund
• T. Rowe Price

• Actively managed
• Homestead Value

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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 funds from same family
• U.S. international stocks bonds

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Target Date Retirement
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Vanguard Target Retirement

• Inception date 2003
• underlying funds have much longer track record
• Expense Ratio 0.21
• 12 return since inception
• Expect 8-10 returns over long run

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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

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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

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Vanguard Target Retirement

• Initial Investment
• 3,000 in IRA or non-IRA
• Subsequent Investment
• 100 or 50 w/ AIP

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T. Rowe Price Target Date

• Inception date 2005
• underlying funds have much longer track record
• Expense Ratio 0.76
• 11 return since inception
• Expect 8-10 returns over long run

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T. Rowe Price Target Date

• Initial Investment
• 2,500 non-IRA
• 1,000 in IRA
• Subsequent Investment
• 100 or 50 w/ AIP

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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

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Vanguard Total Stock Market Index

• Asset Allocation
• 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?

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Homestead Value Fund

• Actively managed

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Objectives

• Low Volatility
• Diversification
• Low Turnover (13)
• Hold stocks for average of 10 years
• Low Risk
• Solid industries and underlying companies
• Sharpe Ratio of 1.46

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Investment Requirements

• Amazing!
• Only 500 for an initial investment, 200 if
  invested within an IRA
• No subsequent investment minimums
• Affordable on any budget!

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Expense Ratio

• Ratio is .76
• Experts recommend a ratio less than 1.4
  Clements,J. (2000). Cutting Through Mutual Fund
  Clutter. The Wall Street Journal. May 2000. D1
• NASD Calculations 10,000 initial investment
  assuming 5 return, 20 years equals expenses of
  2,352
• Use NASD to compare to other funds expenses

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Historical Returns
3 year 5 year 10 year
Homestead 14.46 10.85 9.94
SP 500 Index 10.44 6.19 8.42
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Rating Systems

• Morningstars Stars
• Business Week B
• Consumer Reports 82/100

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Selling Points

• Not the end all-only fund youll ever need but
  its a great place to get started
• Good for long term investors
• Low investment minimum, can set up subsequent
  investment minimums to fit your individual budget
• Management Tenure is 33 years
• Solid returns which outperform its index (Goal of
  actively managed funds)

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Contact Information

• Homesteadfunds.com
• Ticker HOVLX
• 1-800-258-3030
• What questions do you have?

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Focus on the Future

• Past performance is no guarantee of future
  returns.
• Its very difficult to beat the market
  (represented by an index such as SP 500) in any
  one year and even harder to do this consistently.
  
• The only thing you know about the future is the
  funds expense ratio.

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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 Target Date Retirement Fund
• Have 200? Dont want to commit to AIP?
• Homestead Value

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How to open an IRA

• Simple process
• Online
• Call and get forms in mail

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How Does Your IRA Compare?

• Want to transfer to one of our recommendations?

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Its not magic, just do your homework