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financial mutual funds for novices

WRITTEN BY Rose M. Anderson, CFP®

WE ALL LIKE CHOICES, but when faced with

United States, and global funds, which are

more than 8,000i mutual funds, taking a dart to

worldwide. Select the fund with the objective that

the newspaper’s financial section can begin to

helps to diversify your portfolio.

seem like a logical selection technique. But wait; there is a better way. Let’s peel back





magazine | s u m m e r 2 0 0 8

hiring managers to do this for you. For myself, I

the layers of mystery and start at the core of

want the most experienced managers I can find,

importance: the objective of the fund. Every fund

preferably with a long track record on the fund in

must state the type of stocks or bonds in which it

which I am interested. And I don’t want to pay

is investing and their concentration. For example,

too much for them.

a U.S. Large Company fund will be searching for


You do not manage the fund yourself; you are

Every fund has expenses. Every one. Even the

those big companies based in the United States

index funds. If you don’t know what these

with capitalizations over $60 billion. A balanced

expenses are, you could be paying too much for

fund will invest in a blend of perhaps 60 percent

your fund. These expenses are deducted from the

stocks and 40 percent bonds. There are

investment results, which means that in years of

international funds, which invest outside the

low returns, the fund company is reaching into


But you should expect to pay for this advice.

investment results in my account and the best

Briefly, there are three ways to pay: fee-for-

way I know to do that is to keep the expenses

service, which is typically by the hour; a

very low. I’m not a fanatic about it. If there is a

commission; or an asset-based fee.

management team that I would like to have

the fee-for-service basis, but you must have

more, then all right, so long as the emphasis is

follow-through. In my experience, some people

on ‘little.’

get to a certain point and then get busy and

Everybody likes to buy a fund based on its


My preference is to pay the hourly rate on

manage money for me and they cost a little bit

return history. But you can’t simply because it is

never accomplish their goals. So for many people, this option won’t work well.

history. This history serves as a gauge to

peel back the layers of mystery and start at the core of

My second preference is to pay the

measure the manager against the fund’s

commission. It’s very straightforward and a one-

benchmark, assuming the manager hasn’t

time payment on your investment. You know how

changed. If you have a new manager, you really

much it is before you agree to the investment. If

have no track record for that fund with that

you don’t understand it, keep asking questions


until you do understand what you’re spending.

So, where can you find all these informative

My least favorite method of paying for advice

pieces of data for the mutual funds? The

is the asset-based fee. Over time, this will be the

prospectus is the one source that holds it all.

most expensive way for you to invest.

Most mutual funds now have the prospectuses

importance: the objective of the fund.

One last caveat: you should take a look at

available online. Yes, it is worth the time to read

your investments once a year. Do the objectives

through it. You will find a 10-year return history

still feel comfortable to you? What has changed

of the fund. You will be able to read the

in your life? If you are working with a

objective and decide if you are comfortable with

professional, you should schedule a review at

what it describes. The expenses will be spelled

least once a year and whenever a major life

out in detail. This expense area will also detail

event takes place. This doesn’t mean to start

whether there is a front-end sales charge or a

over with new funds, but maybe rebalance or

back-end charge. A sales charge is not a bad

add to an IRA. Investing is fun and mutual

thing, but you should know about these charges

funds are the most efficient way to invest. I hope

in advance so you can make the decision to buy

you enjoy it!

the fund knowing all of the variables.

Tip: Check out the investment glossary of the

A sales charge is nothing more than the fee to the advisor for the direction and advice given

) ) ) mutual funds

your pocket to pay their fees. I like to keep my

American Association of Individual Investors (AAII) at ) ) )

to you. There are ways to reduce this sales Rose M. Anderson, CFP®, is the owner of

charge and it’s all spelled out in the prospectus. There is still a big debate over paying the sales charges: load vs. no-load. It’s up to the individual to decide if you have the time and the tools to dig into the nuances of a mutual fund and decide if it’s right for your investment portfolio. It takes time and patience. An alternative is to seek professional guidance.

Anderson Financial, Inc. and Pure Gallery, Inc. i

Per Chicago’s Morningstar, Inc. as of February 2008.

The information contained in this article is for information purposes and is not to be considered as financial, tax, or legal advice. As with any financial or legal matter, consult your qualified securities, tax, or legal advisor before taking action.

summer 2008|







) ) ) mutual funds


Know Your Investment Jargon Mutual Fund – A fund operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, futures, currencies, or money market securities. These funds offer investors the advantages of diversification and professional management. Funds levy fees for this management as well as 12b-1 fees, exchange fees, and other administrative charges. All shareholders share equally in the gains and losses generated by the fund. Load Fund – A fund sold through a broker. No-Load Fund – A fund sold directly to investors. Alpha – In the case of a mutual fund, the alpha measures the relationship between the fund’s performance and its beta over a three-year period. Beta – The coefficient measuring the fund’s relative volatility. The beta is



Number of shares outstanding multiplied by stock price.

growth or profits but where the fund managers expect this to change. By buying at the current lower prices, the managers expect bigger fund gains

Objective –

when the market recognizes the

Large Cap – Typically contains

opportunities in these companies.

companies with at least $5 billion in

Keep in mind that these opportunities

outstanding market value.

may never be recognized and the

Small Cap – Typically contains

prices of some individual holdings

companies with $500 million or less

may stagnate.

to the rest of the stock market. The

Mid-Cap – Contains companies with a

S&P 500 Stock Index has a beta

market value in between small and

International Funds – Concentrates in

coefficient of 1. A fund with a higher


companies outside the United States.

beta is more volatile than the market,

Micro-Cap – Those companies under

Global Funds – The fund managers

and any fund with a lower beta can be

$50 million in market value.

can find opportunities for investment

Growth – Funds that emphasize

anywhere in the world.

companies that have exhibited faster-

Index Fund – That which follows a

than-average gains in earnings over

benchmark or index. The investment

measure of the degree to which an

the last few years and are expected to

results will most likely trail the

individual value in a probability

continue these high levels of profit

benchmark by the amount of the

distribution tends to vary from the


fund’s expenses.

Standard Deviation – The statistical


Market Value or Market Capitalization –

U.S. Funds – Concentrates on

than the market.


companies that have not shown

companies based in the United States.

expected to rise and fall more slowly

Value – Funds that emphasize

dispersion, the greater the risk.

in market value.

the covariance of the fund in relation


mean. The greater the degree of

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Mutual Funds For Novices  

Let’s peel back the layers of mystery and start at the core of importance: the objective of the fund.

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