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Mutual Fund

blackjack50

blackjack50

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So I am "teaching" an economics class right now and my kids have to watch some Dave Ramsey videos. He has been talking a lot about mutual funds. Can someone walk me through what this is? Maybe give me some idea on where/when someone should get involved in them? I am almost 24 and I am hoping to go to law school so I don't have much money to spare (maybe a couple hundred bucks here or there...but not regularly).

PS:

If any mod sees this...maybe DP might consider adding a money section to the Self Help/Advice thread?
 
If it were me asking, I would probably post a duplicate thread in the advice/ self help section of the forum. That section is for posting about various subjects, not just relationship issues.
 
The best time to become involved IMHO is when you can get it through your employer and they match your contributions up to a certain point or do a flat contribution. It is free money. I personally think that just buying and holding solid stocks would be the better route to take if you are not getting a matching contribution from your employer. When I had one via T. Rowe Price, I felt like I was paying fees I shouldn't have to pay like a fee to switch funds plus and annual fee. When I had a chance to cash out and avoid the penalty because I fit within one of the exemptions for that year, I did it.
 
stonewall50 said:
So I am "teaching" an economics class right now and my kids have to watch some Dave Ramsey videos. He has been talking a lot about mutual funds. Can someone walk me through what this is? Maybe give me some idea on where/when someone should get involved in them? I am almost 24 and I am hoping to go to law school so I don't have much money to spare (maybe a couple hundred bucks here or there...but not regularly).

PS:

If any mod sees this...maybe DP might consider adding a money section to the Self Help/Advice thread?
Click to expand...

it is accepted investment wisdom that one should diversify their investment risk
the mutual fund facilities this in the securities market
your invested money is pooled with that of other investors
the aggregate funds are then used to acquire a divers array of stocks
the intended result is to mitigate the investor's risk if one stock/investment sector is in decline that loss will be spread across the group
this could be done by the investor by buying an array of personally held stocks, but that would require a lot of time and expertise and expense (research) to be done by an individual
mutual funds have track records and the investor can anticipate the future growth of the mutual fund by looking at its past performance, to identify those which seem to have better than average insight
 
How "not familiar" with mutual funds are you?

The basics of a mutual fund is that it is a "pool" of various securities that an individual can invest in. The idea is that this type of investment allows an investors risk to be spread over a selection of products instead of a single product.
 
stonewall50 said:
So I am "teaching" an economics class right now and my kids have to watch some Dave Ramsey videos. He has been talking a lot about mutual funds. Can someone walk me through what this is? Maybe give me some idea on where/when someone should get involved in them? I am almost 24 and I am hoping to go to law school so I don't have much money to spare (maybe a couple hundred bucks here or there...but not regularly).

PS:

If any mod sees this...maybe DP might consider adding a money section to the Self Help/Advice thread?
Click to expand...

Invest in one of the market indices. The fees are inconsequential. Mutual funds that are industry specific suffer downturns as their sector bounces and have much higher fees. Mutual funds that are broad-based are basically bets on management to do better than the market as a whole.

If you'd have bought into the DJIA on January 2, 2003 at 8607, your investment would be worth 15,010 as of yesterday's close -- or a gain of 74% on your money.

See if any mutual fund matches that return. I seriously doubt it. And especially when you figure in their fees.
 
Everyone else has been giving you pretty good advice. The only way I know mutual funds is through my employer's 401K. Every paycheck I put some money into my account, and my employer matches a percent of it. I pick out the mutual funds that it goes to and the company that you go through for your 401K (fidelity in my case) takes that money and buys shares in the mutual funds that you specify. Over time it builds up. Why go with mutual funds? Well mutual funds give you the same advantage that people investing alot of money get.

Say I wanted to invest into energy companies, but not much money. I could go out and buy exxon stock and have all my money tied into that one company. But then if something goes wrong and they go to pot, I'm in trouble. A less risky investment would be an energy based mutual fund. They would take my money, pool it with other people's money, and invest in a wide array of oil companies, solar companies, natural gas companies, refineries etc. so that at the end of the day I have less risk in my portfolio. The downside to this is that if Exxon has a great year and there stock goes up 50%, my investment in to this mutual fund won't go up 50%, because it's not invested entirely in exxon. Mutual funds still go down if there is a market crash, but you are not affected nearly as much by a single company having bad news. So overall you get a more steady growth rate, and are less prone to dramatic ups and downs in single companies.

But at the end of the day I'm not the smartest person around here when it comes to these things. We have some smart people around here that can give excellent advise on particulars.
 
Lutherf said:
How "not familiar" with mutual funds are you?

The basics of a mutual fund is that it is a "pool" of various securities that an individual can invest in. The idea is that this type of investment allows an investors risk to be spread over a selection of products instead of a single product.
Click to expand...

Essentially...no experience. I want to learn about them without taking a college course.
 
stonewall50 said:
Essentially...no experience. I want to learn about them without taking a college course.
Click to expand...

Well, you don't have to take a college course but it would be well worth sitting down with a professional to discuss a few things before getting too involved. I'm sure that Bubba could give you a good overview but just to get the ball rolling I'll point to one fairly popular fund to give you some fundamentals -

https://fundresearch.fidelity.com/mutual-funds/summary/316345206

The link above is to the summary page for a popular mutual fund. I'd recommend clicking the "composition" tab. The information on that tab will tell you what economic sectors are targeted by this fund. As you can see, roughly half of the assets in this fund are invested in financial, IT and health care products. A little farther down the page you can get an idea of what some of those particular products are (in this case it's Apple, FNMA mortgages, Pfizer, etc.).

The fund itself is continually managed by selling and buying various products in these sectors. If, for example, Apple stock went to $700/shr the managers might sell a bunch of that stock and buy something else. They would do this because as the stock value of Apple increases it creates more and more risk in the fund as a whole (you know the old adage about putting all of ones eggs in one basket). As these transactions occur over the course of a year the investors in this fund receive capital gains and dividends which are all netted together and reported in bulk.

A little farther down the page you will see the allocation of fund assets between equities, bonds and other stuff. "Equities" generally means stock and stock means ownership of a percentage of a given company. "Bonds" generally mean loans and people who own bonds get paid interest on money they have loaned to a business. "Other" could be lots of different things including cash, commodities, insurance contracts, etc.

In a nutshell, if you buy shares of this mutual fund you will own a small portion of all the assets in this fund.

If you look at the "summary" tab you will see that this fund has grown in value at a rate of 8.45% over the past 10 years and is up just over 8% so far this year. Buying one share of this fund currently costs $21.73 and there is a minimum investment of $2500 to buy into this fund. The fund pays a management fee of .6% of net asset value per year. In general, a fund such as this tends to grow pretty well without a whole lot of risk.

This summary is VERY generic but should give you a decent idea of what a mutual fund is and how one works without melting your brain with a whole lot of technical information.
 
MaggieD said:
Invest in one of the market indices. The fees are inconsequential. Mutual funds that are industry specific suffer downturns as their sector bounces and have much higher fees. Mutual funds that are broad-based are basically bets on management to do better than the market as a whole.

If you'd have bought into the DJIA on January 2, 2003 at 8607, your investment would be worth 15,010 as of yesterday's close -- or a gain of 74% on your money.

See if any mutual fund matches that return. I seriously doubt it. And especially when you figure in their fees.
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Not disagreeing with your conclusion on mutual funds, but what matters isn't absolute returns but beta-adjusted returns. If a manager is only running a 40% net long exposure book, you wouldn't expect them to get anywhere close to market returns (unless they were amazing). I guess in the case of mutual funds, both are 80%+ net long, so comparing them directly to the market is *reasonable* but not entirely accurate.

That being said, there are great mutual funds out there, but in your case I would research the markets some more and buy a diversified basket of equities and fixed income investments until you learn more about the space.
 
hidingrpolitics said:
Not disagreeing with your conclusion on mutual funds, but what matters isn't absolute returns but beta-adjusted returns. If a manager is only running a 40% net long exposure book, you wouldn't expect them to get anywhere close to market returns (unless they were amazing). I guess in the case of mutual funds, both are 80%+ net long, so comparing them directly to the market is *reasonable* but not entirely accurate.

That being said, there are great mutual funds out there, but in your case I would research the markets some more and buy a diversified basket of equities and fixed income investments until you learn more about the space.
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I'm pretty sure mutual funds are required by law to be long-only. All passive mutual funds are going to have a beta of 1.. it just depends what factor/index you want beta to. I wouldn't recommend new investors selecting activist funds since, on average, they underperform passive over the long run.
 
Rhapsody1447 said:
I'm pretty sure mutual funds are required by law to be long-only. All passive mutual funds are going to have a beta of 1.. it just depends what factor/index you want beta to. I wouldn't recommend new investors selecting activist funds since, on average, they underperform passive over the long run.
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My point is she used the S&P 500 as a benchmark, and a long-only sector-biased mutual fund is not going to have a beta of 1. For example, tech will have a beta of higher than one and utilities will have a very low beta. Very few mutual funds have a beta of 1 unless they are an index fund, in which case don't invest in them. Also, i don't think mutual funds have to be 100% invested either.
 
hidingrpolitics said:
My point is she used the S&P 500 as a benchmark, and a long-only sector-biased mutual fund is not going to have a beta of 1. For example, tech will have a beta of higher than one and utilities will have a very low beta. Very few mutual funds have a beta of 1 unless they are an index fund, in which case don't invest in them. Also, i don't think mutual funds have to be 100% invested either.
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Her point (and mine) was that over the long run indexing is a better strategy for less experienced investors. For people with limited experience and time, trying to generate alpha through market timing, sector selection, or manager selection tends to underperform passive index investing. Mutual funds are a great way for these investors to capture a risk premium over cash, any active management on their part should be through portfolio construction (e.g. 60/40), not market timing or security selection.
 
Rhapsody1447 said:
Her point (and mine) was that over the long run indexing is a better strategy for less experienced investors. For people with limited experience and time, trying to generate alpha through market timing, sector selection, or manager selection tends to underperform passive index investing. Mutual funds are a great way for these investors to capture a risk premium over cash, any active management on their part should be through portfolio construction (e.g. 60/40), not market timing or security selection.
Click to expand...

Yes I know her point and if you look at my original post, I agreed with her conclusion and said exactly what you just stated. My only nitpick was how she benchmarked mutual fund returns, but the conclusion is sound imo.
 
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