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Deeper Dive Into 4 Food Groups of Mutual Funds

Lesson 22 from: Personal Finance for Artists & Freelancers

Galia Gichon

Deeper Dive Into 4 Food Groups of Mutual Funds

Lesson 22 from: Personal Finance for Artists & Freelancers

Galia Gichon

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22. Deeper Dive Into 4 Food Groups of Mutual Funds

Lesson Info

Deeper Dive Into 4 Food Groups of Mutual Funds

So what I did is I pulled this up for morning star morningstar dot com I didn't pay for it. I do have a user I d and password, but I do not pay a cent for it. You can pay for their services and their services are excellent. I just I don't, I haven't, I haven't in eleven years and I've been on it. So just to explain. So what? I did it. This is called there quick. Take report and I sort of chopped it up to put it in one page. But it essentially looks like this. This is all that information that you need to know on one page here's the name of the fund. So this is a vanguard five hundred index fund. Just again. A disclaimer. I'm not suggesting you buy this fund so that's not the purpose of this it's. Just really to teach you about it. I think again, you'll get really clear. So this is an s and p five hundred index funds. So this is going to own the five hundred most actively traded stocks in the new york stock exchange. And it's just copy what they're doing. That's it. This is your large c...

up how do I know it's my large clap large blend category state large blend that's it and there's actually I didn't put it on here but there is a little table that tells you the average size of the company and I think it's like fifty billion let's jump to the company's apple eggs on google microsoft g these are the top five holdings if you click on this so this is all on one page if you click on this when you're on the website, it actually takes you to a long list but these air the top holdings in terms of percentages so you know these companies and there's five hundred stocks here so it doesn't have already seem more real because you know these companies what is my fee load? None so it would either say none or it'll say percentage and if it's a percentage it means that you paid that fee when you bought it the expense ratios point one seven percent a year. So for me to own this I'm essentially paying point one seven percent a year. This particular fund is three thousand dollars toe open once you open it it's only one hundred dollars or fifty dollars at a time so for most of vanguard funds it's either three thousand or a thousand toe open, but once it's open you can add as little as one hundred dollars this happens to be all us stocks, but there are some mutual funds that air some stocks, some international, some bonds. But I put this on here because I'm going to show in a few minutes, some other investments. So do you see right away? Oh, and by the way, it's five stars. So we cut to the chase it's, a large fund it's five stars. This is the ticker. So if you want me to look up a fund that you own, send me this because then I can easily look it up if I don't have the ticker is kind of hard for me, too, while I'm doing the class to really take the time to look it up. It's, a no load fund it's a low expense ratio, here's the holdings. This manager has been around a long time, so I haven't even gotten to performance but aren't surety getting what kind of fun this is here's performance. This is what I love it's. I love this chart. So first of all, I just put this on here I mean, it's it's kind of hard to read but it just really shows you that you're doing with the market's doing so in terms of the fund it shows year to date one year, three or five years so the three year and five year or what's called an annualized number which means if you held this fun for the last three years or a few held it for the last five years it's what you would have earned per year so if I held this fun for the last three years, I earned seventeen percent a year if I held it for the last five years seventeen point it's about seventy percent and I print I did this maybe two weeks ago, so this is fairly fairly recent obviously, if I went online and just plugged vfa annexed to morningstar dot com you get that information instantaneously so that's number one these are the two numbers that I love, plus or minus category and plus or minus s and p five hundred so plus or minus category morning star will look att every large blend beautiful mutual fund there's twelve hundred in their category and though they will, they will literally rank them, so they will say that this fund is doing better than the average and then it is doing better than the s and p five hundred or the same ass, so if you have a fun you khun right away see, am I doing better than the average? Am I doing better than a corresponding index or just the average of that fund? Does that make sense? They're the negative numbers on the snp, right? So what? What this is and that's a great point, javier, is that so essentially this fund did a little bit less worse than the s and p five hundred and the reason why is every mutual fund has about five or ten percent that they can invest in whatever they want and they're probably just keeping in cash frankly, right? And you can see that here cash point six three percent so that's why they're not doing exactly what the s and p s but to me that such a low zero variants is the other one is how they're doing in that category, right? Exactly the purse thie percentage number, which is the fund on the ten year that's the average growth this's retire period this is if I held this fun for the last ten years I did seven and a half percent a year okay, I don't know about you, but if my money grew seven and a half percent a year for the last ten years, I'd be thrilled I only had it for five years it would have done seventeen point four seven a year o I c a year which is a phenomenal yeah phenomenal and ten years this is two down work it's no, this is one done market this is with the recession of two thousand eight when the market went down thirty eight percent again I'm not saying you shouldn't only invested in this but the idea is that first of all if you have a large blend funded home how's that doing compared to this this is kind of a cz good as it gets in terms of cheap you're just buying what the market's doing with a fun like this I will say every large company has an index fund american fund's df fidelity schwab they all have index funds vanguard was the first and they're sort of the leading ones but every company has when I own index funds eh fidelity that are not being card they're just fidelity's version because a lot of companies have copied it since same thing I don't care if his long as it's cheap it's an index final by it in that sense so what question the management at the bottom? Are they employee of vanguard? Yes oh this gentleman has been managing this fund since nineteen ninety one so he works full time for vanguard his salary gets paid from your expense ratio okay, okay yeah so I like that he's been there since ninety one I felt kind of good that he knows what he's doing and sometimes you will see somebody asked me this morning they said when do you sell your funds because on a big picture basis I pretty much do it check up on my mutual funds and I go to morningstar dot com I looked them up twice a year that's it I have four five you know I think I say four five of my core and then I think I've got seven total but the idea is that I don't tend to sell I usually just buy more I think there was an energy fund that are sold recently not energy excuse me commodity so it had a lot of gold and medals and that was kind of hurt a little bit so I sold that is really five percent of my portfolio though so it wasn't but my large cut my small caps there they're pretty stable off course they go down but as long as they're going down less than the corresponding index I'm okay with that I'll talk about asset allocation in a few minutes really how much you should have in each but I tend to not sell I just do a checkup and I might add more off because I have pretty stable funds in that sense as long as I'm properly diversified now what I do do though is that if there is a new manager that has come on I might just do a little bit of research and call the company and say did this manager work within a team because there's probably thirty people that are working in the team under this person so they might only list one or two so sometimes there is a star manager that will leave and start his or her head find or whatever take another job elsewhere and they will promote someone and if I know that person's worked on the team I won't make a change necessarily but if it's truly somebody knew that hasn't been part of it I might sell the fund based on that that's probably the only time I I feel well this is somebody new there running it differently I don't feel comfortable with that, you know when a new person's assigned I mean t o know that date says december tenth, two thousand thirteen but if you're not looking at it twice so you won't know they don't give you a notification on my but they don't know not usually or it might be in a really thick prospectus that you get in the mail that's about forty pages on tu shu thin paper that you were cycle you just thinking a little nine in the bottom and when you get back on and your six month check you disco look michael's going a bit yeah right? And I see the date that says december two thousand thirteen I thought huh? So I might call the company I'll call vanguards eight hundred number of fidelity or whoever the company and just say we noticed there's a new manager were they part of the team? I've probably done that twice in ten years truthfully, but that's yeah, but it's on it wasn't on the checklists, but as I mentioned it's probably the last item that I might mention so when you're starting to invest in a say I'm going to open a new sep ira I would just buy one of these funds and then as I'm increasing the money that I you know, we're going to talk about that because maybe you only have three thousand so you can afford this you could only afford one right now, right? Right and so sorry I know I probably don't know know but like here's the ideas that you know for your twenty years you want the four food groups as I mentioned, but what if you only have three thousand dollars total? So what do you d'oh? We'll talk about that so I just want to get into some more funds before because it's such a great question so here's my large cap so what I did is I pulled up for funds I pulled up the four food groups here is a small cap so they call it small growth this happens to be three stars um the expense ratio so the expense ratio on small cap funds and international funds tend to be a little bit higher because if you think about it, they need to do a little bit more work to really research the smaller companies or international maybe they're based in the u s and they're researching companies that are not in the us, so those are a little more expensive. Um so again, it's still half a percent that's still one percent lower than the market average still saving one percent, no load, obviously again, this is mostly us talk, but you can see here they've got some non us a little bit of cash, they've got about ten percent that they could do whatever they want with what are these? Cos I have no idea I have never heard of any of these cos I don't want to hear about them they're small companies, they're like new tech pharmaceutical growth, whatever, but them by the small company I've never heard of and do well with it um and three stars you know, I that might be a little bit of a warning signal for me, but what I know I wanted to kind of stick to just four funds from vanguard to show is an example, but um, but you can see her it's small growth and then here's the returns. So the fund, you know, one year, forty three percent last three years, nineteen percent a year, five years, twenty three percent a year, ten years, nine percent a year, because it probably really went down in two thousand eight when the market went down. So here this is probably, you know, one thing I don't like about morningstar is that they're comparing it to the s and p five hundred, and I don't think that's a valid comparison because the s and p five hundred is large stocks and this a small stock so it's like apples and oranges. So but again, the plus or minus category what I'm seeing here, it's consistently doing betterthan small cap funds for the last three years, it's done one and half better than small cap funds last, so, you know, five years, half a percent better, I'm not trying to beat it by leaps and bounds and just ordered two better than the average, so this is an example of a small cap fund. So this is another one of your food groups called mid growth, so right, so small cap midcap, because it really is it's the point is they're not large cap and so I'm just putting it in small cap it would also be mid caps so it's really means that maybe some companies are a little bit bigger, so maybe they're worth five billion or eight billion individually. By the way, you would ask the question about the net asset value, so to buy one share of this fine is a hundred dollars and seven cents, so if you buy one hundred dollars, you're going to get, you know, probably ninety percent of a share and then if you sell it so this is really what goes up and down, so they're essentially taking all of these stocks and coming with the average to come up with this price so that's the logistics of actually buying a mutual fund this is literally what it costs you the s and p five hundred hundred sixty seven dollars a share that's just one hundred dollars you're going to get a little less in the share here you will get a little more than half a share. So this is thies. Small cap slash midcap great question so this is the international fund so it's interesting to see it's us foreign large value but it's large blend so that means it's large companies not based in the u s again, you probably know these companies from you tomoe royal bank of scotland escapee samsung seven and I no idea what this is this is in kroner in japanese yen and um this is in the pound this is in your oh great let them let them pick companies that are not based in the u s thes on the whole if I were to pick an international fund my first one would probably be more of like a large one of more stable companies and then my second one so if I were too once I have this I might pick an emerging market one but maybe he's dealing with small companies or dealing with emerging market from india or china wouldn't be my first choice because that's going to be really aggressive and risky love that but I first want to have something a little more stable all right let's go through the numbers I feel like I'm on npr marketplace early we're gonna start the number's um it's a no load fund it's a little less than half a percent yeah, we saw the holdings this one's a little cheaper it's only thirty seven dollars a share so this they're comparing it to this index this is the international index which stands for it's morgan stanley so morgan stanley came up with it and manages it so they created it that literally stands for europe asia far east so it's the international indeed so, it's a great measure to see how we're doing compared to international, so this one is doing so. I don't really look at year today in one month because it's too short of a time period, I tend to look at one year, three year, so one year, you know, it's and this is why it's a three star funds so it's done a little bit better than the index little bit worse, a little bit better, but it just gives you an idea. I just want to kind of do what the market's doing. I don't want to beat the market if I could beat the market again, I wouldn't be standing up here, I'd be in my island, in same parts or why you're something, um and then the last fund. So this is where I really struggled, because for those of you that have been falling to market a little bit and I'll talk about that, is the fourth food group would be bonds unfortunately, bond's been doing terrible the last six months, and that's just really related to interest rates. Does that sound familiar to anybody? That bonds have not been performing well? So bond funds on the whole been losing money, the stock market's doing great guns, so it should work that way inversely. But what I have decided to choose and this could be your I only have enough money for one fund what should I do? So this is why instead of a bond fund I decided to show you what's called an allocation fund so this is a mutual fund that has stocks and bonds in it so this is a great one stop shopping fund so as you can see here this has sixty percent bonds some a little international and the rest is us so you can see here it's got bonds us treasury, chevron johnson and johnson so it's mixed together it's stocks and bonds together and one fund I love thes finds love them I love them for if you're just starting out and you have no idea what to put into your raw for yourself and you just need one fund, this is a great starting fund or this is what I call my five to seven year money because it is a little more conservative, but yet I do still have some stocks in here tongue when the market does does better. So this is my money that I'm you know, maybe if I've got my five year goal by seven year goal, so this is my sort of glorified savings account in addition like I have my rainy day fund and feel good about it, but I want to still invest because let's look at the return so I'm paying point two five percent which is incredibly low no load it's a five star fund on a return basis eight point five six ten percent eleven seven nine ten years seven point four, three percent a year so it's doing anything from seven to eleven percent a year so clearly my emergency money is not in here because this will go down when the market goes down, but over time this is doing seven to ten percent a year and so for my longer term money that's not retirement like my you know, I call my wife and I want to know why in a few years and I want to stay in a really nice house I want to take surf lessons and do all those things that costs a lot I'm not doing it right away, so this is you know, I'm joking or maybe you're working in a corporate job and you want to start a business in a few years so this could be your start my own business? Or maybe you really want to save up for your car? This could be the car fund for three to four years, so if it goes down a little bit you can ride it because it's not like, oh my god, I didn't get a job next week, I don't have money fund turnover mean yeah, absolutely that's such a great point. So let's, go back to the first one. So what this mean? So this first one is an index fund? I believe the others are not, which is you can see that the turnover so that means there's five hundred stocks in here, so there are on ly buying or selling three percent a year. So if you have this in a non retirement account in a regular account and they made money on the stocks they were selling, you would be having to pay taxes even though you didn't sell the fund. So that's, why three percent turnover is great this one low turnover? Yeah, you know dio absolutely because you don't want to, but you also want the fun to do well, you know again, it's not probably I think if it wasn't a fund, if it's in your retirement account, it doesn't matter because you're not paying taxes, lana so the turnover does not matter for retirement accounts at all. It's really, if you're having it in a regular account that maybe you're going to buy and sell or just hold for the next few years, this one they're buying or selling nearly sixty percent, they're making trades all the time, which they should be, I mean, you want them to make educated guesses and bets on these companies you want them to say oh ally data is not doing well let me sat letter let me by same with the international so they're selling fifty percent of the stocks in here every year this one they're doing a little bit less thirty six percent because there's more bombs in here and they are holding the bonds for the income part so I just taught you about four different mutual funds is this amazing it's really powerful right? So I'm not saying should buy or sell these but I think you have an idea is if you want to just start fresh so let's just say you have ten thousand dollars and you're putting money into a sub ira you could do twenty five percent and these four funds or four funds like them we'll talk more about asset allocation in a few minutes but that's just really the practical application of you save the money for funds so that's twenty five hundred dollars this is a three thousand minimum so maybe it doesn't work exactly like that. So if say you do have ten thousand dollars maybe you d'oh so you only pick three because it's a three thousand minimum so you might do like you know, thirty three hundred each roughly or thirty three, thirty three two maybe you'll do thirty three in the large s and p thirty three in the small calf um actually no you went to large he would do the allocation one because that had large innit and bonds and then you do the international so you get your your, um your large and your bonds your small cap your internet national so that could be a way does that make sense, theo the reason of my keep asking if it makes sense because if you don't understand it I want to know because if you don't understand it may be people who are listening down you two twenty five percent well because I realise twenty five percent in this case would be two thousand five hundred each and these particular funds have a three thousand dollar minimum so that's just the logistics of it so you would divided between you were divided three thousand three hundred between those right? Because here the allocation fund has bonds and large stocks in it so you're getting the two of the food groups and one plus you're getting your small cap and your international oh so that's z only have funds are really fantastic for being they are they're not a be all and all absolutely but they can be a great thing if you don't have a lot of money frankly people always make fun of me when I say frankly honestly because they say are you lying the rest of time but I'm not but if you had I'd say twenty thousand I prob we would want to just not do the allocation, maybe, and I'd want to just be a little more specific. That's me? I just like getting a little more specific if I can, being a little more percentage focused that's just me that it's not a right way or wrong way at all. Question a little clarification. Cindy says this may be a dumb question, but what do you mean when you say a regular account versus our retired that's? A first opposite of dumb question. It's a very smart question, and I guarantee other people thinking of it. So this will be a good time to talk a little bit about asset allocation is again, what are your goals and that's your timeframe. So for most of us were really starting with two main time frames we have are less than five years, which is our emergency that's the jobs don't come in. I'm freaking out. I need some money. What am I investing in? Yeah, not much. Money markets, treasury bonds, short term bonds. I'm keeping it safe. So if the market dips, which it will my money is okay for the short term. Then the next really step that we're doing with investments. Is our long term, which is retirement and that's, the ira's that we talked about yesterday, the rock, the saps, things like that, that is money that you're putting in that you're saving on taxes, it's growing, tax deferred or tax free. You can't touch it, though, till you're sixty years old, fifty nine and a half technically, but you cannot touch him. You shouldn't touch it. I don't I want to hear the I definitely had an excuse yesterday, someone said, but what if I know you can in my mind, you don't touch it and you'll be thanking me when you're sixty now you have other money, so let's just say you've already you know, you're a great savior and by the way, have worked with already people here in the studio who are good saver, so I know freelancers and artists out there are good savers. I know that I'm confident of that. So say you've got this, you've got this, but you want to start investing on other places. You could buy any of these mutual funds in a non ira you just called vanguard up and you say, want to by what's called a taxable or individual account that means that you, khun, bite and sell it whenever you want. Will you pay taxes on it? Yeah it's income so let's just say you bought it a ten thousand you sold it a year or two later of fifteen thousand you've made five thousand dollars kudos to you and you got to pay taxes on it it's income so that's what's called a regular taxable account so that's money that you have invested for your five to ten year cole or just not your emergency not retirement so I've got really three goals I've got you know I think I'd shown this the first day I had my chase account which is where I bank day today and I've just got my bare bones minimums that I don't pay fees for their I have my emergency account which I haven't my online bank which is here which is just my you know, six months, nine months really worth of emergency expenses I have my safe to spend my tax fund you know just really my like emergency what I need everything else I haven't finality and a fidelity have an ira my sap my old four oh one k of a raw fire I'm and I've got a few ira's but I do have a taxable account that if I need the money I can cash it out it'll go you up, it'll go down so this is your asset allocation the idea is there are some of you that are listening that are watching this that are investing for retirement, but maybe retirements five years away or ten years away, because you're a little bit older. I know we had some calls yesterday of people were in their fifties, so you can still put in ira, but you are going to be a little more conservative about it. When I say conservative is, you might have really the two risk youth categories air, small cap in international, so maybe you'll have five percent in each. So maybe a few of fifty thousand dollars. You'll just do twenty, five hundred or three thousand in these two on. Then the rest just split up in large cap and bonds.

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Day 1 Presentation
Day 2 Presentation
Day 3 Presentation
Monthly Spending Plan Worksheet
My Money Matters Kit for $7
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Budget Worksheet
Emotional Side of Money Checklist
Mutual Fund Checklist
Personal Finance Checklist
Retirement Planning worksheet

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