Getting started with mutual funds

**kv968** · 02-11-2007, 11:44 AM

Re: Getting started with mutual funds

You may want to start here with learning about investing:

http://www.morningstar.com/Cover/Classroom.html

It's a classroom type site set-up by Morningstar. It can get quite indepth as you go along but the beginning of each lesson should give you an idea of what each investment is about.

You can also check out the websites of some of the mutual fund companies such as Vanguard, T Rowe Price and Fidelity. They all have pretty good explainations of IRA's, funds and investing.

As far as what you should be allocating towards riskier or more stable investments, that's up to you. There is really no right answer but it's good to be comfortable with whatever asset allocation you choose since you'll be more likely to stick with it. It sounds like you're not too comfortable with the current risk your taking on and you should let your DH know that. You have time and can afford to take some risks but if it's bothering you, it may be too much. Or maybe you don't know enough about it and if you learned a little about investing maybe you would be ok with it.

Also remember that just because mutual funds are somewhat diversified within themselves, that doesn't mean that there's no risk involved. Some mutual funds are very risky.

**Scanner** · 02-11-2007, 12:41 PM

Re: Getting started with mutual funds

Okay, beleive it or not, it's pretty simple - we all just make it sound complex at times.

There's a simple formula - 100 minus your age = % stocks/equities you should be in.

So, if you are 35, your Dh (what's a Dh?) and you should be 65% stocks and 35% bonds. It's an interesting formula b/c if you are 70 y.o, notice even that age group should still be 30% stocks/equities to get some yield.

Now, this is only a reference point - but I think it's a good one for you. You seem upset by the "downs" so for you probably having 35% bonds or bond mutual funds isn't a bad idea. This is very normal for a female - females are smart, they have intuition about things and I have learned to respect my better half over the years as she is about at your level on investing.

Since you are a "5th grader", I would memorize these vernaculars:

Equities: things you own. Stocks (you own a co.), your house, gold, silver, collectibles.

Debt sector: Money you loan someone or something. Corporate bonds, US bonds, CD's, municipal bonds, savings accounts are debt sector investments.

Yield: what the investment makes in terms of percentage return, usually annual.

Vehicles: What you will put your investments in. For instance, if I say, I am using "silver" as the vehicle for my equity investments. It's good not to get too obsessed with the vehicle.

Mutual fund - where you pool all your money together, hire a manager and they buy stocks or bonds or real estate with the money and sell stocks when they think it's going to tank.

Risk: a chance you'll lose something or make something

Reward: the mollah you get

Equities are almost always riskier than debt sector but the rewards are almost always higher (forget about junk bonds - that's investing 401 and I haven't even taken that course).

There. . .you graduated. You won't ever need a mutual fund salesman again.

By the way, I am probably college level on investing (although different philosophies than a lot) and I think being in individual stocks with only $18,000 is not good. I have more than that and I don't own any stocks, only mutual funds. To get diversification (meaning spread out risk and reward in your portfolio), you need about $100,000 to buy that many stocks. So in this case, I would change your "vehicle."

Just my opinion.

By the way, if your husband is real risky like me - hammer a deal out - you assume control of the debt sector investments and let him assume control of the equities.

**kv968** · 02-11-2007, 01:32 PM

Re: Getting started with mutual funds

Originally posted by Scanner

There's a simple formula - 100 minus your age = % stocks/equities you should be in.

So, if you are 35, your Dh (what's a Dh?) and you should be 65% stocks and 35% bonds. It's an interesting formula b/c if you are 70 y.o, notice even that age group should still be 30% stocks/equities to get some yield.

Now, this is only a reference point - but I think it's a good one for you. You seem upset by the "downs" so for you probably having 35% bonds or bond mutual funds isn't a bad idea.

This is a good reference point equation for your stock/bond ratio. You could also use 110 minus your age. For me personally, 35% is too much to be held in bonds at that age. However, as scanner pointed out, it will reduce the volatility of your portfolio and that may ease your mind a bit.

Originally posted by scanner

By the way, I am probably college level on investing (although different philosophies than a lot) and I think being in individual stocks with only $18,000 is not good. I have more than that and I don't own any stocks, only mutual funds. To get diversification (meaning spread out risk and reward in your portfolio), you need about $100,000 to buy that many stocks. So in this case, I would change your "vehicle."

Just my opinion.

In my opinion, you don't need $100,000 in order to be properly diversified in stocks. However I do agree that you should change at least some, if not most, of your "vehicle" into mutual funds or indexes.

**kv968** · 02-11-2007, 01:37 PM

Re: Getting started with mutual funds

Originally posted by scanner

(forget about junk bonds - that's investing 401 and I haven't even taken that course).

I have and I still say forget them

**jodi** · 02-12-2007, 06:09 PM

Re: Getting started with mutual funds

Wow, those responses were really great. DH enjoys playing the game, and we've done okay (aside from one big loser), so I think we are going to keep what we have, but look to mutual funds for all our future investments, at least until we get closer to $100k

Now when you say we should be 70% equities and 30% bonds...I can achieve this mix through mutual funds? I tend to think of mutual funds as holding stocks, but if I am reading you right, I can also get some that purchase/hold/sell bonds, which are safer (good for me), although may not yield as high a profit (bad for DH - dear husband). In other words, I shouldn't have to be picking any individual stocks or bonds, but can achieve the instant diversification no matter what vehicle (stocks or bonds) I chose, if I invest in different types of mutual funds.
Since I am basically 100% invested in stocks at this point, it sounds like I should start with my initial $3k in a bond mutual fund. That would give me about 14% bonds/86% stocks, which would be a step in the right direction.
I appreciate you dumbing down the vernacular for me

**humandraydel** · 02-13-2007, 03:39 AM

Re: Getting started with mutual funds

Just keep in mind a few things:

Bond funds are definitely long term investments. In the current "rising interest rate environment" (if it still is?) bonds tend to drop in price so it is possible to lose some principal. And of course the opposite is true - prices rise when interest rates fall.

Bonds should be held in a tax advantaged account.

**jodi** · 02-13-2007, 04:21 AM

Re: Getting started with mutual funds

Roth = tax advantaged account?

If I get something set up to automatically add x amount to my funds per month, then I should be able to beat up the ups and downs in the interest rates by dollar cost averaging, shouldn't I? Or does that only apply for the ups and downs of the stock market?

**Scanner** · 02-13-2007, 05:52 AM

Re: Getting started with mutual funds

Now when you say we should be 70% equities and 30% bonds...I can achieve this mix through mutual funds?

Jodi,

Yes, you can use mutual funds as your "vehicle." (See? We are talking investments now). In fact, you could even acheive it through one mutual fund (find a "balanced fund" that invests in 70% stocks and 30% bonds; I think Vanguard's Wellington Fund is near that).

However, as the above poster noted, part of investing is assigning goals. "Savings" is a broad term - what is the money being saved for?

If for retirement, you should pick a tax-sheltered account (yes, a Roth is an example of one). 401(k)'s, 403(b)'s, Traditional IRA's, and SEP-IRA's and Keough's if you are self-employed are other examples. Each tax shelter varies but what it means is that the money grows tax-free (Roth - you are not taxed on exit; Traditional - you get to write it off on your taxes the year you contribute but are taxed on exit). You see, if you have a savings account, after the 3% you make per year, you actually pay tax on the earnings, maybe lowering your yield to 2.5%. Over the years, that loss really adds up.

This is why tax sheltering is important (but IMO a bit overstressed these days).

But once the money goes into the account, it cannot come out lest you pay a 10% tax penalty to Uncle Sam. You can move it to other "vehicles" but the money cannot be spent on a vacation to Fiji or an Endless Pool www.endlesspools.com , which I have been lusting after. That money is "earmarked" for retirement in the gov't's eyes.

So, if you are going to take $3,000, you are probably better off with a bond mutual fund. I haven't shopped the bond market in a long time so I am a little rusty but I am not sure you can buy individual bonds for that low (you probably can). I think Treasury Bill bonds (money you loan the US) are $10,000 minimum.

I am not advising you (probably against the law and I need a license for that) - just educating you and then you and your husband sit down and talk about what you want to do.

But let's go to some advanced lesson planning - bonds vs. bond funds and the risk. Which vehicle? An individual bond or a bond fund?

With bond funds, you have "market risk." As someone noted, if interest rates go up, the bonds you hold today go down in value should you ever want to sell them. This affects the bond funds performance as the mutual fund managers somewhat turn these over and sell them periodically on the bond market. So, it's theorectically possible that one year, you get 0% return in a bond fund, but then next year, 5% return. Maybe the year after that 7% return. It's because some people trade bonds.

With individual bonds as your vehicle, you have "prinicipal risk." If I buy a $3000 bond from GM today at 7% for 5 years, there is a chance, big or small, that GM won't be able to make good on it's debt. But there's no market risk, because you don't intend to trade it. So, you are promised a 7% for 5 years and if there's no default 7% you'll get. You get bonds from a bond broker.

A rule of investing - debt sector investments are generally safer because a company must honor it's debts before it's stock shareholders. So, when they are counting their money up at the end of the year, it's bond holders are honored first, then it's shareholders. That being said, it's still possible to default.

If you want to hedge your bet, you can buy "insured bonds", which insure the principal against default (generally found in municipial bonds) but it will pay about 1-1.5% lower in yield.

Muni bonds are an interesting investment because they are tax-free investments. I know one of my colleagues who had his entire savings in insured muni bonds (his philosophy, not mine). Ptetty cool to have a million dollars in tax-free distributions/year, huh? But because they are tax-free, they are inappropriate to put into Roth's ano other tax-sheltered accounts (why have double tax sheltering?).

Investings is a lot like healthcare - you learn the language being spoken and you don't feel clueless. If we use a word that sounds foreign to you, just speak up.

Finally, (I am on a roll here), your husband needs to learn the difference between speculating and investing. The two terms do have some overlap. It sounds like he is "playing the market" or "trading" with stocks.

That is speculating, not investing.

An investor seeks to own over a lifetime or for specific goal. An investor is an "owner" or a "loaner."

A speculator seeks a positive outcome by trading.

Now, we all speculate to a certain extent - we had that discussion on another thread. If you loan the gov't money for 5 years through a bond, you "speculate" that the US gov't will still be around in 5 years, collecting taxes, and solvent to pay the debt.

Or if you buy a stock mutual fund, you speculate that corporate America over 20 years will do well.

But, it's very "speculative" to assume $20,000 worth of Dell Computers is going to be worth $30,000 by Dec. 31.

A concept of becoming an investor is the "Investing Pyramid." Picture a food pyramid where fats and oils are at the top (actually, I think the traditional food pyramid is bogus as I am an Atkins devotee but let's just use it) - well, anyway, where fats and oils are is where your "speculating" should be, maybe 10% of your portfolio.

That is, he should be just picking stocks or stock mutual funds he wants to hold for the long haul - he should not be "playing the market" with 70% of your portfolio.

There's no such thing as a "sure thing" in the market and you both need to learn to manage risk and reward.

If he needs to satisfy the "risk bug" withot speculating, he could invest in emerging markets or commodities which are very volatile but not as speculative.

I hope I wasn't long winded - I really enjoy simplifying investing. I probably missed my calling. If you want a good place to become more educated, suscribe to Kiplinger's magazine - they are kind of like the "Cliff Notes" of investing.

**Scanner** · 02-13-2007, 05:58 AM

Re: Getting started with mutual funds

Jodi:

If I get something set up to automatically add x amount to my funds per month, then I should be able to beat up the ups and downs in the interest rates by dollar cost averaging, shouldn't I?

You understand dollar cost averaging? You ain't no 5th grader - you are pulling our legs

**jodi** · 02-13-2007, 10:04 AM

Re: Getting started with mutual funds

Don't assume because I can pull a big word out that I completely understand it

And, yes, I think you did miss your calling. I have been reading a Kiplinger's book on investing every night for several weeks, and your post just made more sense to me than anything in the book, even though I have been reading about these exact same topics! I think the reason I get so intimidated is because I don't truly understand half of what I read.

I guess I explained DH's philosophy wrong. He doesn't trade. We buy and hold. But still, it is all individual stocks. He picked one last year that paid dividends, but did horribly. We ended up selling half (probably when we weren't supposed to), and the half that we still have is just about worthless. That's why I don't think we are cut out to invest in individual stocks - we simply don't know enough about picking good ones, or when to hold vs. cut our losses and sell. Plus we just don't have enough money to risk losing a big chunk on one stock!

Thanks for the advice about picking a mutual fund that already balances stocks/bonds. I guess I never even thought about the fact that the funds would already balance everything for you.

The saving I am talking about here is strictly for retirement, so we will continue to fund our Roths. Eventually, when we get back to the point where we can fully fund both Roths, I would like to start setting aside 10% of our income outside the Roth (in mutual funds?), as described in the Wealthy Barber. This money would be for big ticket items, i.e. cars or vacations. We would know reasonably well ahead of time when we needed it, so could (theoretically) not have to pull it out at a moment's notice. We would still maintain our EF for times when we did need cash fast (liquidity - another word I know!).

I can't say thanks enough to everyone who responded - you have all put a lot of time into helping a complete stranger.

**Scanner** · 02-13-2007, 10:21 AM

Re: Getting started with mutual funds

I guess I explained DH's philosophy wrong. He doesn't trade. We buy and hold. But still, it is all individual stocks. He picked one last year that paid dividends, but did horribly. We ended up selling half (probably when we weren't supposed to), and the half that we still have is just about worthless. That's why I don't think we are cut out to invest in individual stocks - we simply don't know enough about picking good ones, or when to hold vs. cut our losses and sell. Plus we just don't have enough money to risk losing a big chunk on one stock!

JODI,

You are welcome.

And don't worry - you think you are bad at picking stocks? Major mutual fund companies owned ENRON before it went belly up. And they are supposed to be the professional analysts.

The average investor, including me, is not good enough to decide what stocks to pick - that's what the mutual fund manager and their analysts are supposed to do - examine the fundamentals of a company and buy, sell, or hold.

Frankly, they get more inside information than we are capable of.

And I agree with your self-assessment. Others here have said that you don't need 100K to invest in stocks and become diversified but I disagree. It's impractical to buy 10 shares of this stock, 5 shares of this one, and so on to build a diversified portfolio let alone decide what's an acceptable loss, that you can't do no more with one stock. You are going to have to pay commissions to move that stuff. Is your stock tanking just because the market is tanking or is it because it's been poorly managed? Those are decisions you have to make that mutual funds do for you.

**Ima saver** · 02-13-2007, 10:42 AM

Re: Getting started with mutual funds

Jodi, I have been in mutual funds for about 18 years. after a while, I bought some individual stocks also. I have done much better just sticking to mutual funds. I think buying good index funds is the way to go. I would chose an index 500 stock fund like Vanguard. It made about 16% last year. There is also an index bond fund, but i hold very little in bonds. I do like Vanguard star fund because it is a balanced fund.
I also keep quite a bit of cash in a money market paying more than 5% and some in certificates of deposit.

**kv968** · 02-13-2007, 01:24 PM

Re: Getting started with mutual funds

Originally posted by Scanner

This is why tax sheltering is important (but IMO a bit overstressed these days).

But once the money goes into the account, it cannot come out lest you pay a 10% tax penalty to Uncle Sam. You can move it to other "vehicles" but the money cannot be spent on a vacation to Fiji or an Endless Pool www.endlesspools.com , which I have been lusting after. That money is "earmarked" for retirement in the gov't's eyes.

Thanks for a very thorough explaination Scanner. However these two points I have to chime in on. IMO, tax sheltering is VERY important and should be done whenever it can as long as it doesn't harm the return (ie. muni bonds vs. taxable bonds).

Also, just to make it clear, unlike other tax-sheltered accounts, with a Roth IRA you can withdrawl your contributions at any time without paying a penalty or taxes.

**kv968** · 02-13-2007, 01:32 PM

Re: Getting started with mutual funds

Originally posted by jodi

Thanks for the advice about picking a mutual fund that already balances stocks/bonds. I guess I never even thought about the fact that the funds would already balance everything for you.

There are also mutual funds out there known as "target-date" funds where you would choose the year you're planning on retiring and the fund will automatically adjust your stock/bond/cash ratio as you near and continue through retirement. They may not contain the "perfect" match in what you're looking for as far as asset allocation goes but if you don't want to be bothered with occasionally rebalancing your portfolio they may be something for you to look into. Vanguard, T Rowe Price and Fidelity offer them so you could check out their websites to see if they interest you.

Getting started with mutual funds