Smart Saving and Investing

So what is a Mutual Fund anyway? There are many ways to answer this question but here are a few definitions from some excellent sources:

‘A mutual fund is a form of collective investments that pools money from many investors and invests their money in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager who is also known as the portfolio manager, trades the fund’s underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding.’ Source

‘A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, or other securities.’ Source

…For them, the financial industry invested mutual funds - pools of stocks or bonds that are managed by professional investors.’ Source

‘…A mutual fund brings together people, too–people who want to invest. The fund pools together the group’s money and invests it for them in a collection of securities, such as stocks or bonds or a combination of the two.’ Source

‘A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.’ Source

‘A mutual fund pools money from hundreds and thousands of investors to construct a portfolio of stocks, bonds, real estate, or other securities, according to its charter. Each investor in the fund gets a slice of the total pie.’ Source

So What is a Mutual Fund?

Hopefully by now you know what a mutual fund is. To put it simply - a mutual fund is basket of investment vehicles including stocks, bonds and other securities.

Have a look at the Hodges Fund (HDPMX). This is an excellent fund that is categorized as a Mid-Cap Blend fund by Morningstar. The father-son dynamo fund management team of Don and Craig Hodges list the funds top 25 weekly holdings at their website. Pretty cool. The stocks that are listed are considered the investment vehicles, stocks in this case and the stocks are in a mutual fund called the Hodges Fund, symbol HDPMX.

You can visit Morningstar, MSN Money, Yahoo Finance, and Google Finance to view other mutual funds and their holdings. Just find the ticker symbol, for example HDPMX to look up funds you’re interested in.

Mutual Funds are managed by one manager who makes the day-to-day decisions or the fund could be managed by a team of people who you really don’t know or don’t know who’s on the team today or tomorrow. That’s why it’s good to find a fund with someone who has a track record that you can pinpoint to help determine the success of the fund’s performance in the future.

A lot of folks mention that a fund’s past performance won’t guarantee future success, which is true. However, just like a great baseball pitcher or batter, your odds of success go up when you are in a fund with a great manager who has a great track record.

Another group of folks want to know what stocks are in their funds so they can tell their friends and acquaintances what stocks they own in their mutual funds. That is not a good thing to do because the stocks you knew were in your fund yesterday could not be in your fund today.

Stock Mutual Funds - Also known as “equity funds”, are mutual funds that invest only in stocks. They are considered to be more risky. However, sometimes with greater risk comes greater reward. Over long periods of time, stocks have outperformed both bonds and cash investments. I would be 100% in stock mutual funds while I’m under 50 years old. Pretty darn aggressive but that’s just me.

Bond Mutual Funds - Bond funds invest in bonds and other debt securities. These make them more conservative investments that aim to protect your investment money. You typically choose bond funds for income and diversification. Bond funds are considered “low risk”. I would move 30% of my money into bond funds if I were 50 and over. That’s a bit aggressive at age 50 but that’s just me.

I’ll save other types of funds for another post but the stock and bond funds are two biggies.

My Secret

Let me share with you that over 25 years ago I had no idea what a mutual fund or even a stock was. After searching far and wide on how to invest in stocks, make my own stock selection, etc. I discovered mutual funds and felt a great relief as I could invest in stocks without having to make the day-to-day buy, sell or hold decisions and that there were folks out there called fund managers who would do that for me.

One outstanding resource that I encourage folks to listen to is The Mutual Fund Store Radio Show hosted by Adam Bold. Adam talks about mutual funds, saving, kids and college, and mutual fund recommendations. Check it out!!

Still don’t know what a mutual fund is? If you need more information, below are more great articles to read or you can just do a search on mutual funds using your favorite search engine. You can also shoot me an email at billstevens2000@gmail.com or comment on this article to start a discussion.

• Money 101: Investing in Mutual Funds
• Invest Wisely: An Introduction to Mutual Funds
• Mutual Fund Education Alliance

If are new to mutual funds and want more mutual fund analysis, recommendations and information on what to look for in mutual funds, keep an eye on this site for future mutual fund news.

written by Bill Stevens

When you sign up for your employer’s retirement plan and it allows you to select mutual funds, you could be presented with a laundry list of mutual funds or a very limited choice of mutual funds.

So what do we do? We ask friends and possibly relatives for advice and go to www.smartsavinginvesting.com to get some help. Then we question our choices, ask our co-workers what we should do and just close our eyes and pick something.

Well, that’s the way I did years ago when I first started out investing in my employer’s retirement plan. No one really knew what to do. There was no Internet around to help do research. You could read trade magazines until your eyes turned red and you still didn’t know or understand what the heck to make of it all.

On top of that your co-worker ended up day-trading in and out of their mutual funds based on the economic news of the day, which is the worst thing you could possibly do and there are now provisions in place to help stifle that type of trading behavior.

So here we are today with a whole gamut of websites, blogs and every type of media to help figure things outs…or still continue to confuse the same person starting out in mutual funds under their employer’s retirement plan.

Well, I’ve narrowed it down to using a couple sites, namely Morningstar (a very well trusted site on financial data and news) as well as Fund Alarm. Fund Alarm allows you to look at a fund by typing in the symbols of the fund, let’s say FMAGX for Fidelity Magellan and quickly find out if it’s considered one of their “3-Alarm” funds.

At Fund Alarm, a “3-Alarm” fund can be considered a sell this fund immediately or do not buy decision. Here is a screen shot of Fidelity Magellan from Fund Alarm.

Notice the areas I circled. You can instantly tell that Fund Alarm considers this a “3-Alarm” fund. Here is their link that helps you determine if you should sell this fund or not. The second, bigger red circle displays the fact that the fund has underperformed its benchmark the Vanguard 500 Index for the last 12 months, last 3 years, and last 5 years. Which is not good. You want to match or handily beat the benchmarks used to compare your funds.

So unfortunately I would have to say don’t buy Fidelity Magellan at this time and if you’re currently holding it, get rid of it first thing in the morning!!

Now, let’s take a look at a fund and use Morningstar and Fund Alarm together to do some quick research and decision making. Our choice today is PRGFX - The T. Rowe Price Growth Stock fund. This fund falls into the Large Growth category.

From previous posts you might remember I favor this asset allocation for 2007:

• Large Growth - 35%
• Large Value - 20%
• Small Growth - 20%
• Small Value - 15%
• International - 10%

The selection of funds where someone chose PRGFX was a company that only offered employees 20 different funds to get into so it can be tough when you don’t have a bunch of choices.

So let’s take a look at PRGFX at Fund Alarm:

Now this one looks very good at Fund Alarm. You can use this link at Fund Alarm to read about “How to Read the Fund Alarm Data Table.” It tells us that it’s a “NO-ALARM” fund and has beaten its benchmark (the Vanguard 500 Index) for the last 12 months, last 3 years and last 5 years. That looks very good and it would be one that I’d pick for the selections that were allowed at this employer.

Here’s the “Snapshot” page from Morningstar:

You can see the red line on the chart shows us that funds performance for the last 5 years…almost, because 2007 isn’t over yet. So with Morningstar they like to compare a lot of funds to the S&P 500 as its benchmark. Also, the data at Morningstar is more up to date than the Fund Alarm site. If you look closely at the date of the data reported on PRGFX at Fund Alarm you see “Data as of 5/31/07″. Morningstar is reporting as of 6/30/07.

Notice the Fund YTD (Year-To-Date), 3 year and 5 year under the Morningstar chart. This is the percentage (12.05, 15.01 and 14.96 respectively) of return on the hypothetical $10,000.00 that Morningstar likes to use over those time periods. Under those figures are the positive numbers that indicate how much the fund beat its benchmark during those times. Again, Morningstar is using the S&P 500 as the benchmark in this case.

Well, hopefully you’re not completely confused and there are lot of terms to think about and discover. I only presented a portion of the Fund Alarm site and Morningstar site. You can get into much more detail at the Morningstar site.

I hope this article presented some useful data and techniques to use when evaluating the mutual funds in your life. Let me know if you have any comments or questions and we’ll get them answered together.

If you want to make this process extremely easy then browse over to Smart 401k and pay for them to select your funds for you if you can afford to. Smart 401k you’ll answer a short questionnaire so they can determine what type of an investor you are and then they’ll email you the recommendations based on your fund choices and what type of investor you are as far as risk is concerned.

written by Bill Stevens

Subtitle: We’re Goin’ To Hawaii!!

Don’t Buy Variable Annuities. Why? Because they could provide your money manager with a free trip to Hawaii on you right from the get go (when you first fork over your cash).

Well, that’s not the only reason and it’s not the only investment that could do that.

There are different annuities (variable, fixed, etc.), but here’s the downside on variable annuities and they’re just not worth getting into. Besides being confusing as heck for some folks, sometimes the financial person trying to sell them doesn’t come right out and tell you they are annuities.

Variable Annuities are a family of mutual funds you can invest in by an insurance company. They can:

1. Have the highest commissions and that’s why some of the financial folks sell ‘em. (Trip to Hawaii part)
2. You have a limited number of investment choices. There might be 20-30 funds in the annuity but there are tens of thousands of funds out there to choose from. What are the odds that the annuity has the best 20-30 funds to choose from?
3. Fees and expenses can be very high. Over time could possibly be 20% right off the top of your earnings. (Trip to Hawaii part)
4. Taxed as ordinary income - could be taxed much higher than investing in the same mutual funds outside of the annuity.
5. If you take money out the first year it could be charged 7% or more.
6. And a host of other rules and regulations. Just say ‘No’.

Again, it would be better to invest in mutual funds that are going to work for you from the get go.

written by Bill Stevens

When you have a big fund it’s harder for the fund manager to maneuver. For example, a pretty darn good fund in the Fidelity family of funds is the Contrafund. However, it’s become rather large at greater than 70 billion dollars in assets.

So, the fund becomes representative of the market. If the market goes up, most likely the fund will go up and if the market goes down, most likely the fund will go down.  The fund’s manager has to get creative to move those type s of dollars around.

It’s like parking semi-trucks in a fast food restaurant. So what to do? Well, I still think if you don’t have other choices, the Fidelity Contrafund is still a great fund with a great fund manager. I would hold it in a company retirement plan like a 401k, 403b, 457 Plans.

But, there are smaller funds in this category of Large Company Growth funds that are more agile. It would be good to find a fund with a great fund manager that is managing say 1 or 2 billion dollars worth of assets.

So one example would be the Brandywine Blue (BLUEX) fund. It has more than 2 billion dollars in managed assets and the fund manager William F. D’Alonzo would have more strategies to implement with the investments in the fund.  However, the initial investment to get into this fund would be a whopping $10,000.00.

So for some folks this is just an example and not what you should do with your money.

written by Bill Stevens

I’d like to do some interviews and post them on my site.

written by Bill Stevens