November 30, 2009

MUTUAL FUNDS (Putting the Prospectus into Perspective)

While the argument for index funds is a compelling one, there will always be investors that opt for the more "tantalizing" world of actively managed mutual funds. If you find yourself in this camp, understanding the objectives and "fit" of the fund relative to your particular goals is paramount. The mutual fund prospectus will be one of your most valuable tools to address these questions. The prospectus is a summary of a funds investment philosophy, its management, its financial highlights (and lowlights), costs, etc. It is wise to spend time perusing the prospectus prior to ever putting a dollar into a fund. The prospectus ultimately helps you to "know what you're investing in" ...


FUND COSTS. One of the first things to examine is the funds cost structure. The amount of money charged in fees tends to vary dramatically from fund to fund.
Expense Ratio – Total percentage of annual assets that a fund takes to cover operational costs (i.e., marketing, etc.). Some funds have expense ratios in excess of 2%; many, however, have expense ratios at or lower than 1%.
Loads – Sales commissions tacked onto funds - come in numerous 'flavors' - front-end, back-end, level, or no-load.

FUND SUMMARY/OBJECTIVE. What is the fund trying to accomplish? What is the philosophy of the company (i.e., value, growth, etc.)? What area is the fund focusing on - a certain sector (i.e., technology, health care, etc.); international companies; small, medium, or large companies, etc.? What are the specific risks with investing in this fund? Obviously the funds objectives are critical - I should be investing in something I understand, as well as something that will ultimately meet my [long-term] investment goals.

FUND HISTORY. How well has the fund performed over the past year, 3 years, 5 years, 10 years, and since inception? How does the fund compare with its index (and "peer" funds) during that time? How did the fund hold up during the market meltdown? How has it rebounded during the market upswing since last March? Keep in mind this is a "rear view mirror" approach to performance and doesn't guarantee that it will continue to perform at the same level that it has in the past (for good or bad).

FUND MANAGEMENT. The importance of fund management seems fairly obvious. A more challenging question perhaps is ... How much of the performance should I attribute to the person(s) managing the fund? Should I sell my fund if the fund manager is no longer managing the fund? Some people prefer funds managed by a group; perhaps group management may have less volatility in the transition if someone were to leave (in theory anyway). What is the experience/ track record of the manager/ management team? Do any research on Peter Lynch during his time running the Magellan Fund at Fidelity if you don’t think the manager of a particular fund makes a difference (he averaged a return of 29% per year during his 13 year tenure)!

FUND TURNOVER. Indicates how frequently a fund buys and sells its holdings. The higher the percentage, the greater the fund's buying and selling activity. A rate of 100%, for example, would indicate that a fund essentially changes all of its holdings once a year. Typically a higher turnover rate generally indicates a more aggressive manager -- engaging in more frequent buying and selling -- a practice which has both pros and cons.

ADDITIONAL INFO. Some funds will also offer information from outside agencies. Companies like Standard & Poor's and Morningstar are independent agencies that rate mutual funds on numerous criteria and rank them relative to "peer funds." Obviously there is more to fund selection than if one of these companies suggests the fund is good, but it is one more thing you can look at in the decision-making process.

I wanted to make this as easy an exercise for you as possible, so I have taken three mutual funds from three different no-load mutual fund companies and provided the links for you to be able to go directly to the funds prospectus. YOU SHOULD NOT VIEW THIS AS AN ENDORSEMENT OF THE FUNDS. I HAVE SELECTED THREE PROSPECTUSES FOR YOU TO REVIEW TO AID IN AN EDUCATIONAL PROCESS. You will notice that each fund has very different objectives.

-- Fairholme Fund

-- Fidelity Low-Priced Stock Fund

-- T. Rowe Price Mid-Cap Value Fund

November 12, 2009


Next month marks the fifth anniversary of the "free credit report" legislation (which enables all consumers to obtain a free credit report from each of the three (Equifax, Experian, and TransUnion) major credit reporting agencies annually). Unfortunately, the misleading freecreditreport.COM ad campaign has been much more visible to consumers than the legitimate free credit report site of the government, located at ANNUALCREDITREPORT.COM ...

I was pleased to see Ron Lieber's "A Free Credit Score Followed by a Monthly Bill" article in the New York Times this past week. He does a nice job outlining the pitfalls of (a "service" that not coincidentally is owned by Experian -- one of the major credit reporting agencies). Most notably, people are often unknowingly "signing up" for a $14.95/month credit monitoring service as part of their "free" credit report offer. Don't believe me? Then you must believe that their monitoring services are vastly superior to the competition's services since they own more than twice the market share of the next three largest credit monitoring players combined! In addition, although Experian doesn't share information about subscription turnover, Lieber reported that the average enrollment of a monitoring subscriber was under a year. Not the sound of an intentional purchase.

Apparently the Federal Trade Commission is not buying the pitch either. They have long believed that consumers are being deliberately led away from the "real" free credit report offered by the government and that Experian is profiting from the confusion created (somewhere in the ballpark of $700M per year; not bad given the $54M they spent on the TV and radio spots last year). Recently, to combat the catchy TV jingle, the FTC came up with their own jingles and misleading URL - freecreditreport.GOV ... Nice job FTC!!

"Other sites may turn your head; they say they’re free, don’t be misled. Once you’re in their tangled web, they’ll sell you something else instead."

Their full video ads are below...

November 03, 2009


Over time, most of the news for beginning investors hasn't been good news ... Seemingly, one company after another has raised minimum investment requirements as many companies don't want to deal with "those people." I recall about a decade ago as a Professor at Iowa State a large mutual fund company that allowed new investors to open an account with a one-time investment of $100 or an automatic investment of $25 every three months. A short while later they changed their policy and required $50/month automatically (currently one of the lowest options) or a one-time investment of $1500. When I called them to find out why they changed their policy, their answer was understandable -- they had a bunch of accounts with $100 in them. As a financial educator at the time working largely with college students, I recall the frustration as there were very few options that were viable for a college student or new grad wanting to get started with investing. Since then, the viable options have become even fewer.

There are currently a small handful of no-load fund companies that will allow a beginning investor to start with no up front money if they set up automatic investments of $50/month. T. Rowe Price, TIAA-CREF, and USAA (available to the military) are the biggest.

I was excited to learn a few months back about Schwab. Charles Schwab is a company that has been around a long time but had never excited me (until now) ... Schwab offers several low cost index funds. An account can be opened with $100. Subseqent investments can be made for as little as $1 (literally a buck - the minimum has been tested). Hearing that did excite me. I was then excited further to see the news release yesterday where they have lauched their own set of ETFs (exchange traded funds -- some homework for you if you don't know what they are) with the lowest expense ratios in the industry and became available starting today (11/3/09) with ZERO COMMISSIONS (half of them rolled out today and the other half will roll out next month). The first ETFs available commission-free. FINALLY SOME GOOD NEWS FOR BEGINNING INVESTORS!! Kudos to a financial company taking some consumer-friendly steps.

PS - If you're curious, no, I didn't go from Iowa State University to Schwab ... I'm actually currently a government contractor providing financial education to the military. Charles can thank me later for the free advertisement, although I have no problem sharing information when it's better than the competition.