Mutual fund question

[m3racer]

How much $$ should I invest into mutual funds outside of my 401k? I realize there is no absolute rule but I would like to set some investment goals for myself. Is 25k/year too much money to allocate into mutual funds?

[Scanner]

Mutual funds are just a "vehicle" for investing. You could be 100% in mutual funds or 0%, depending on your philosophy and goals.

If you are looking to save $25,000/year, you would probably want a "tax-advantaged" type of mutual fund outside of your sheltered account. I am not sure exactly what they do to keep taxation low (reduce capital gains, reduce income investments), maybe someone else knows but every major mutual fund co. usually has a tax-advantaged type of mixed fund.

If taxes are indeed a consideration (and if you can save 25k/year, that probably denotes a decent household income), I would actually buy muni bonds or a muni-bond fund outside of your shelters.

Muni-bond funds almost escape all taxation and returns average about 5% nowadays.

Now, if this isn't about taxes and that's NOT why you are asking this question, let me say this:

With $25,000/year, probably $1000-$5000 of that should be devoted to speculative investments if you are long term in your goals.

Speculation is often missing from this forum.

Speculative investments usually DON'T involve mutual funds (although they could, like an emerging market) and usually involve making a play on a stock, options, or commodities.

In short, you could have an entire portfolio of mutual funds or nothing at all. Sorry to be so vague.

[m3racer]

My primary goal is build wealth. I believe that saving a certain portion of one's salary is always going to be the backbone of accumulating wealth. However, I would like to invest in mutual funds to help me achieve my personal financial goals quicker. How much $$ is recommended in any particular mutual fund? How much is too much for one particular fund?

[humandraydel]

Develop an asset allocation and work from there. Is this money for retirement? Make sure you use a tax efficient index fund. I prefer Vanguard Total Stock Market (VTSMX or VTI). Also, your retirement portfolio should be examined as a whole - that is, both taxable and tax advantaged. Bonds and REITs should be in tax advantaged and tax efficient funds (like VTSMX) should be in your taxable account.

[Broken Arrow]

My primary goal is build wealth. I believe that saving a certain portion of one's salary is always going to be the backbone of accumulating wealth. However, I would like to invest in mutual funds to help me achieve my personal financial goals quicker. How much $$ is recommended in any particular mutual fund? How much is too much for one particular fund?

I too believe in saving a portion of my salary... well, for the sake of financial health. Anyway, I like that.

A mutual fund is a fairly generic term, as there are several types that are geared towards different goals.

I do recall that you're still fairly young, so although mutual funds are fine, I do think it would serve you well to be fairly aggressive right now. It's just as well since it appears that you're interested in high gains so long as you're willing to accept the associated high risks.

Also, you'll want to minimize the fees and taxes.

I know it's kind of a broad answer, but it was kind of a broad question so....

[disneysteve]

How much $$ should I invest into mutual funds outside of my 401k?

How much $$ is recommended in any particular mutual fund? How much is too much for one particular fund?

I'd say the answer to how much to invest is as much as you can. We can't give you a dollar amount because we don't know your income, how much is going into your 401K, what your living expenses are, etc.

How much to put in any particular fund should be determined by your asset allocation. With stocks, the rule of thumb is to not have more than 10% of your portfolio in any one company, but that doesn't apply with funds since they are already diversified. That's where you allocation comes into play. If you have $50,000 in investable assets and your allocation calls for 20% in international stocks, then you shouldn't have more than about $10,000 in your international fund.

Sometimes, early on, it is impossible to meet the allocation you set because there are fund minimums to account for. For example, you need $3,000 to open a Vanguard fund, so you might need to have $3,000 in your 500 Index fund and nothing in your international fund until you have saved up enough to open that fund account. Then, you might end up with 50% in each until you gradually add to your 500 index fund to bring that up to a larger percentage of the total. So what I'm saying is that the asset allocation should be a goal, but you might not be able to stick to it from day one.

[jIM_Ohio]

If you have $25k per year to invest, individual stocks might save you costs in long run (transaction costs of stocks are less than that of mutual funds).

Consider:

$25,000 invested in 10 stocks. Pay $10 to purchase each stock. $100 expenses year 1.
$25,000 invested in 1 diversified mutual fund charging .2% expenses. $50 cost.
year 2 for mutual fund charges same .2%, so another $50 comes out.
year 3 mutual fund charges same .2%.

You won't be charged for the stocks until you sell them.

There is more work involved with buying individual stocks, but many, many advantages.

Pros:
1) you have control over all capital gains and what tax year they are paid.
2) you have lower costs
3) you can sell losers to offset income or capital gains.

Cons:
1) you need to research the stocks
2) you need to maintain the portfolio (meaning check up on it once a month, maybe)
3) you need to find a reliable broker (this is easy, but some brokers come and go).

IMO, if you have $25k of disposable income to invest for wealth accumulatation, you would want it invested at least 50% in equities. If you choose to put some in bonds, the muni bond suggestion was good because of tax reasons.

The goal should be highest post tax return, the goal should not be to avoid taxes.

[disneysteve]

If you have $25k per year to invest, individual stocks might save you costs in long run (transaction costs of stocks are less than that of mutual funds).

Consider:

$25,000 invested in 10 stocks. Pay $10 to purchase each stock. $100 expenses year 1.

This assumes that the 25K will be invested in a lump sum. What if, instead, OP is putting in $2,000 per month, which is what most of us do. Dollar cost averaging is what makes mutual funds so appealing. I can send in $50 or $100 or $200 per month to several different funds with no transaction fees. I can't do that with stocks. I'd pay a commission each time I made a purchase.

Otherwise, you are right as far as fees are concerned. And if diversification is a concern, then ETFs can be used instead of individual stocks.

[jIM_Ohio]

This assumes that the 25K will be invested in a lump sum. What if, instead, OP is putting in $2,000 per month, which is what most of us do. Dollar cost averaging is what makes mutual funds so appealing. I can send in $50 or $100 or $200 per month to several different funds with no transaction fees. I can't do that with stocks. I'd pay a commission each time I made a purchase.

Otherwise, you are right as far as fees are concerned. And if diversification is a concern, then ETFs can be used instead of individual stocks.

If $2000 per month is the amount being invested, I could see two choices.

a) send to money market, then buy stocks 12 months from now
b) each month buy one stock for $2000 ($10 cost). Each month switch which stock is purchased. In this regard homework is not as intense as decisions for what to buy can be mulled over for 30 days.

I am not suggesting avoid mutual funds, I am suggesting that with the magnitude of amount being invested, individual stocks should be on the radar as an option. This option is not available, IMO, to someone like me which only invests $625 each month.

[Scanner]

Good discussion.

I can see there is no "one answer" to this.

If you buy 10 stocks and decide to manage them yourself, you are putting yourself in this dilemma:

When do you "cash out" and take a profit (assuming there is growth)?

or

When do you "cash out" and take a loss?

The mutual fund manager makes this professional decision for you. To me, that's worth $40/year, even a couple hundred dollars per year, to make that stressful decision for me.

I can only tell you what I would do and you take it from there. If I had $25,000/year to invest and it was to "build wealth" (that suggests you'd rather have "growth" than "income"), here's what I would do:

$4000/year into a Roth IRA. Make this an International Mutual Fund.
$11,000/year into a mutual fund that is domestic (again, consider a tax-advantaged one)
$5000/year into a small cap or mid-cap fund
$5000/year into something speculative - make a play on something - a single stock, consider leveraged stock options, fund an account for futures. . .something very risky. Do your research.

If you don't want to blow $5000/year on something risky, raise the small-cap and lower the speculative investment to $3000.

Just be sure to budget for taxes, if you make a killing.

EDIT: As you can see, to answer your question in the most generic of answers, I am advocating 80% of a portfolio to "mutual funds" and 20% to some other vehicle.

[jIM_Ohio]

Good discussion.

I can see there is no "one answer" to this.

If you buy 10 stocks and decide to manage them yourself, you are putting yourself in this dilemma:

When do you "cash out" and take a profit (assuming there is growth)?

or

When do you "cash out" and take a loss?

The mutual fund manager makes this professional decision for you. To me, that's worth $40/year, even a couple hundred dollars per year, to make that stressful decision for me.

I can only tell you what I would do and you take it from there. If I had $25,000/year to invest and it was to "build wealth" (that suggests you'd rather have "growth" than "income"), here's what I would do:

$4000/year into a Roth IRA. Make this an International Mutual Fund.
$11,000/year into a mutual fund that is domestic (again, consider a tax-advantaged one)
$5000/year into a small cap or mid-cap fund
$5000/year into something speculative - make a play on something - a single stock, consider leveraged stock options, fund an account for futures. . .something very risky. Do your research.

If you don't want to blow $5000/year on something risky, raise the small-cap and lower the speculative investment to $3000.

Just be sure to budget for taxes, if you make a killing.

I agree on no one answer.
I agree that $50/year is a small price to pay for professional management... the .2% ER would not have a manager per se, though, that would be an index fund, more than likely.

So the difference in costs between a managed fund (.7% ER) and the stocks favors the stocks more. But someone without time might still find more value in the more expensive mutual fund.

From my standpoint, one goal of mine is to have a dividend portfolio which accounts for around 10-25% of my needed income for retirement. Favorable tax treatment, payout increases each year (on average), so there are many, many advantages to this.

Another goal is to control taxes, so unless fund is managers first quadrant, the only "tax favored" fund which I know that does not pay out a penny in gains/dividends, then I think indivudual stocks gives investor more control.

**edit, upon review, it did pay out a dividend in July for first time since I've been watching fund**

Managers first quadrant:
MFQTX: Profile for MANAGERS AMG FQ TAX MANAGED U S - Yahoo! Finance

[Scanner]

JimOhio,

Yes, I think investing for a goal of "income" is a worthy goal, and one that has made a recent comeback in years, although not the level to where our grandparents were, who sometimes almost exclusively invested for income (dividends).

Investing for growth seems to be the rule.

[disneysteve]

I think investing for a goal of "income" is a worthy goal, and one that has made a recent comeback in years, although not the level to where our grandparents were, who sometimes almost exclusively invested for income (dividends).

Investing for growth seems to be the rule.

I think growth investing is more common today by necessity. Years ago, people weren't responsible for their own retirement planning. They had pensions and could count on SS to meet their needs. Today, we are on our own. If I invest for income, I'd never be able to retire. I need the higher return from growth investments to meet my retirement needs.

[Aleta]

The other side of that is growth and income. That is hoping that it appreciates in value while giving you income. Rental income is a good example of that.

[kv968]

Another goal is to control taxes, so unless fund is managers first quadrant, the only "tax favored" fund which I know that does not pay out a penny in gains/dividends, then I think indivudual stocks gives investor more control.

**edit, upon review, it did pay out a dividend in July for first time since I've been watching fund**

Managers first quadrant:
MFQTX: Profile for MANAGERS AMG FQ TAX MANAGED U S - Yahoo! Finance

The only "slight" problem with that fund is the $2.5 minimum initial investment. You could make a $1000 initial investment into it via an IRA but what's the sense in holding a tax-efficient fund in an IRA? Although it is good fund regardless.

I've been eyeing up T Rowe's Personal Strategy Growth fund myself TRSGX. It's not a "tax-advantaged" fund per se but it does somewhat perform like one.