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Mutual Funds vs. ETFs, Stocks, and Bonds
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by Mike Rowan www.Erollover.com 2008
Mutual Funds vs. ETFs, Stocks, and Bonds
There are many different kinds of investments that you can purchase inside of your 401k, IRA, or other retirement accounts. However, the most common type of investment for your 401k or IRA plan is the Mutual Fund. Before you begin buying mutual funds, it???s helpful to understand how they compare to other popular types of investments, such as ETFs, stocks, and bonds.
ETFs
Exchange-traded funds (ETFs) are the security type that is most similar to mutual funds. First created in the early 1990s, ETFs are index funds that trade like stocks. They offer the broad diversification of mutual funds with the instant liquidity of stocks: ETFs can be bought and sold throughout the trading day, unlike mutual funds. In addition, they often have low expense ratios, some of which are even lower than those of traditional index funds.
Why Buy Mutual Funds Instead of ETFs?
There are several considerations to take into account when deciding between mutual funds and ETFs:
??? Cost: Transaction costs, also known as commissions, are fees investors pay every time they buy or sell a security. Though you can buy no-load mutual funds for free from most fund companies, you???ll pay a commission each time you buy or sell an ETF. If you???d like to buy your investments gradually, in stages, without paying commissions each time, mutual funds are likely a better choice than ETFs.
??? Selection: Though ETF offerings are multiplying quickly, in some areas they don???t yet rival the selection offered by the thousands of mutual funds on the market. If you???re looking for a specific type of investment, your only choice may be a mutual fund.
??? Flexibility: Like index funds, ETFs track the performance of a fixed selection of securities. As such, they lack the flexibility to respond to changes in the marketplace that affect the value of the particular securities they hold. Actively-managed mutual funds may be your best choice if you prefer to own investments that can adapt constantly as markets change. On the other hand, large mutual funds are often unable to effectively shift their holdings in response to changing market conditions. Mutual funds also sometimes have minimum holding periods, which penalize you for selling your fund shares until a certain amount of time has passed, ranging from six months to several years.
Individual Stocks
Though mutual funds make it very convenient and easy to own hundreds of individual stocks with just one investment, they require you to give up control of the specific stocks you own. There are two reasons why surrendering control of the individual stocks you own might lower your returns:
??? Capital gains taxes: You???ll incur capital gains tax liabilities just from holding a mutual fund, even if you later sell the fund at a loss. The amount of capital gains tax liability you incur is up to your fund manager???not you???because he or she decides how much stock to sell and how often to sell it.
??? Bad picks: Some mutual funds place a sizeable portion of their holdings in just a few stocks. If one of those stocks plummets in value, the fund will also. Conversely, if one of the fund???s stocks shoots up in value, you won???t have the freedom to sell it. In addition, since stocks don???t charge investors expense ratios, you pay only the transaction costs required to buy and sell. That means if a stock increases in value by 10%, you???ll actually receive a 10% return on your investment, minus whatever commission costs you???ve incurred and taxes you owe on your profit.
Why Buy Stock Funds Instead of Individual Stocks?
There are several reasons why you may want to own stock funds instead of stocks:
??? Diversification: A portfolio of several stock mutual funds, each of which holds a basket of many different stocks, is more diversified than a portfolio that contains only a few individual stocks. More diversification means less risk.
??? Volatility: Volatility refers to the amount that an investment???s value tends to fluctuate investment???s value. Generally, individual stocks are much more volatile than mutual funds. If volatility makes you uneasy, mutual funds are a better choice than stocks.
??? Cost: With certain exceptions, you can usually buy mutual funds without incurring any transaction costs. Each time you buy or sell a stock, you???ll pay commissions.
??? Convenience: Mutual funds make it easy to build a balanced portfolio of investments with minimal time or effort. To build a balanced portfolio of individual stocks, you???d need to spend hours researching each stock before you buy and then monitoring your holdings on at least a weekly basis thereafter.
Individual Bonds
Individual bonds are a compelling investment for investors looking for a steady stream of income: you buy a bond with a certain interest rate and maturity, or duration, and you then receive that interest for the life of the bond. If you buy $1,000 of a bond with a 5% interest rate and a maturity of 10 years, you???ll receive $50 per year for ten years. The price of the bond can fluctuate until its date of maturity, but if you hold the bond until it matures, you???ll receive your original principal back in full. If you sell the bond before it matures, you may receive more or less than the price you originally paid and your interest payments will cease.
Why Buy Bond Funds Instead of Individual Bonds?
There are two main reasons to own bond funds instead of individual bonds:
??? Diversification: Since bond funds usually hold many different bonds of a given type, you can diversify instantly by buying just a few funds, each of which specializes in a different type of bond.
??? Convenience: By buying one bond fund, such as the Fidelity Total Bond Market Fund??, you can get instant access to a broad assortment of bonds in just one investment, complete with a yield roughly equal to the average yield of all the bonds in the fund. Using a bond fund is not only more convenient, but also less time consuming and expensive, than buying a portfolio of individual bonds.
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Asset Allocation: A Sound Investment Strategy
Asset Allocation: A Sound Investment Strategy
Erollover.com 2008
In today’s complex financial markets, you have an impressive array of investment vehicles
from which to select. Each investment also carries some risks, making it important to
choose wisely if you are selecting just one.
The good news is that there’s no rule that says you must stick with only one type of
investment. In fact, you can potentially lower your investment risk and increase your
chances of meeting your investment goals by practicing “asset allocation”.
What Is Asset Allocation?
Asset allocation refers to the way in which you weight diverse investments in your
portfolio in order to try to meet a specific objective. For instance, if your goal is to pursue
growth (and you’re willing to take on market risk in order to do so), you may decide to
place 20% of your assets in bonds and 80% in stocks.
The asset classes you choose, and how you weight your investment in each, will probably
hinge on your investment time frame and how that matches with the risks and rewards of
each asset class.
Stocks, Bonds, and Money Markets Here’s a closer look at the risk and reward levels of
the major asset classes:
* Stocks — Well-known for fluctuating frequently in value, stocks carry a high level of
market risk (the risk that your investments’ value will decrease after you purchase them)
over the short term. However, stocks have historically earned higher returns than other
asset classes by a wide margin, although past performance is no predictor of future
results. Stocks have also outpaced inflation (the rising prices of goods and services) at
the highest rate through the years, and therefore carry very low inflation risk.
* Bonds — In general, these securities have less severe short-term price fluctuations
than stocks and therefore offer lower market risk. On the other hand, their overall
inflation risk tends to be higher than that of stocks, as their long-term return potential is
also lower.
* Money market instruments1 — Amongst the most stable of all asset classes in terms of
returns, money market instruments carry very low market risk. At the same time, these
securities don’t have the potential to outpace inflation by as wide a margin through the
years as stocks.
1An investment in a money market fund is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Although the fund
seeks to preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the fund.
Before exploring just how you can put an asset allocation strategy to work to help you
meet your investment goals, you should first understand how diversification (the process
of helping reduce risk by investing in several different types of individual mutual funds,
target date funds, target risk funds or individual securities) work hand in hand with asset
allocation.
When you diversify your investments among more than one security, you help reduce
what is known as “single-security risk”, or the risk that your investment will fluctuate widely
in value with the price of one holding. Diversifying amongst several asset classes
increases the chance that, if and when the return of one investment is falling, the return
of another in your portfolio may be rising (though there are no guarantees).
For example, in 2002, large-company stocks lost 22.1%, while long-term government
bonds returned 13.8%2. (Keep in mind that past performance cannot guarantee future
results.)
This chart illustrates sample portfolio asset allocations: Low Risk (those nearing or in
retirement); Moderate Risk (middle-aged investors); Aggressive Risk (younger investors).
*Allocations are presented only as examples and are not intended as investment advice.
Consult a financial representative if you have any questions about how these examples
apply to your situation.
Asset Allocation Can Work
The above chart can help you select an appropriate allocation for your investment
portfolio based on your life stage. For instance, at age 25 you may decide to invest with
the goal of retiring in comfort within 40 years. Most likely, your investment goal is to
achieve as much growth as possible — growth that will outpace inflation substantially. In
aiming to reach this goal, you may allocate 70% of your assets into aggressive growth
stocks, 20% into bonds, and 10% into money market instruments. You have years to ride
out the wide fluctuations that come with stocks, but at the same time, you potentially lower
your risk with your bond and money market holdings.
Because your goals and circumstances are unique, you may want to talk with a financial
representative who can help you tailor an allocation strategy for your needs. Generally,
your asset allocation will change as you reach different stages in your life, as your
investment goals also change along with these shifts in lifestyle.
If you have been investing aggressively for retirement for more than 20 years and are
now less than 10 years from retiring, protecting what your investment may have earned
from market ups and downs may become more important. In this case you may want to
gradually shift some of your investment allocation into your bond and money market
holdings. Keep in mind, however, that many financial experts recommend that some
growth investments be considered for every portfolio to potentially protect your buying
power in the future.
A Simple Process, Some Dramatic Potential Results
Asset allocation is a simple concept, yet vital to long-term investment success. In fact, a
landmark study cited in Financial Analysts Journal shows that about 90% of the variability
of average total returns earned by balanced mutual funds and pension plans over time
was the result of asset allocation policy23. For many individual investors, the asset
allocation decision amounts to choosing what types of mutual funds to invest in and the
amount to invest in each type of fund. Others may want to add individual securities to this
mix after exploring their investment options.
Regardless of the asset allocation strategy you choose and the investments you select,
keep in mind that a well-crafted plan of action over the long-term can help you weather all
sorts of changing market conditions as you aim to meet your investment goal(s).
Points to Remember
1. Asset allocation is the way in which you spread your investment portfolio among
different asset classes, such as stocks, stock mutual funds, target risk funds, target date
funds, bonds and bond mutual funds.
2. When prices of different types of assets do not move in tandem, combining these
investments in a portfolio can help reduce the variability of returns, commonly referred to
as “market risk”.
3. Mutual funds are pools of securities, usually offering diversification within a single
asset class. Some mutual funds like target risk and target date funds may include several
asset classes.
4. The asset allocation that is right for you depends on your investment timeframe, goals
and tolerance for risk.
5. As your investment timeframe and goals change, so might your asset allocation. Many
financial experts suggest reevaluating your asset allocation periodically or whenever you
experience a milestone event in your life such as marriage, the birth of a child, or
retirement.
Asset allocation and diversification do not assure a profit or protect against a loss.
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Now Is The Time To Open Your 401k For Retirement
Now Is The Time To Open Your 401k For Retirement
Submitted By: Rebecca Game
What is a 401(k) plan?
The name is derived from the Internal Revenue Code established in 1978. It’s presently administered by the government section called the Employee Benefits Security Administration, also known as the EBSA.
A 401(k) plan is a plan usually used for retirement and is funded by an employee contribution. Some companies will match the contributions up to 100% of the employee’s contribution and yet some companies do not offer any matching funding. The BNSF Railroad is one of these such companies that does not offer even a $1 match for their employees.
The funds are contributed from the employee’s paycheck BEFORE taxes. The fund will accumulate completely tax free until it is withdrawn. Most businesses or companies have these retirement plans in place or they can create them.
There are a lot of advantages of having a 401K plan:
1. Employees can contribute pre-tax money which helps reduce the tax owed from their paychecks.
2. Any company contributions are also tax free until withdrawn.
3. As the funds are compounding, you are attaining a good profit on your invested funds.
4. The money you have funded in the plan can be moved around from one company to another. This isn’t available in a pension.
5. Your 401K is also protected from garnishments and is protected by pension laws because it is a personal investment plan. The only time it is not protected from garnishments is in domestic caes or cases of child support, but it IS protected from creditors.
6. You can borrow against your own 401(k) and the payments you make are put back into your own account along with the interest. The interest you pay on the loan is paid to you as well. You are actually borrowing the money from yourself and paying yourself back with interest. Most plans only allow you to borrow up to 50% of your fund account and only 2 loans at a time. You can borrow more than once if you find yourself in a financial hardship.
You should note that it is hard to get your contributions, (aside from a loan), before the age of 60 without paying a lot of penalty fees. The penalty fees can take a lot of the interest profit you may have received over the years. The plan is not insured by the Pension Benefit Gauranty Corporation, also known as the PBGC.
You do have many options for investing in your 401K plan. You will usually be investing in mutual funds. This helps protect you from having all your eggs in one basket. Mutual funds can consist of:
Money market funds
Treasuries
Stock funds
Bond funds
Since the 401K plan is a long term investment, it should be able to handle market fluctuations without damage to your fund. Since stocks usually outperform other types of investment this is a great option for retirement security.
About the Author
Rebecca Game is the founder of Digital Women ®, an online community for women in business. A 30 year entrepreneur and dedicated to helping other women find business loans and business grants. Visit her site: http://www.digital-women.com Loans for Women http://www.digital-women.com
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“Something Every Dating Partner Needs To Know”
How many of you are already influenced by online dating? Are you familiar with online dating and its popularity? Do you know what online dating is all about? If your answer is YES, then it is clear that you are interested in dating using the Internet.
Through the help of the Internet and cell phones we all feel that the world is now a much smaller place, thanks to the latest communication technology. But, in spite of our fast- paced mobile society, Online dating, and high speed travel, many are facing new kinds of social challenges. It is difficult to meet new people . And when you do, it is better to verify a person’s past before you make any serious emotional commitment.
It is true that internet has become an ideal instrument in today’s society for swindlers to reach the people all over the world with very little effort. Before you go any further, when meeting someone new, think about some of the facts such as: Have you just contacted an online predator, one among the con artists crawling Internet dating sites for hopeful romantics… they have victimized others by stealing their trust, hearts and their money. And what if they are after you… there are some horrible people hiding in the shadows looking to capitalize off of your hope and trust.
Believe it or not… People Lie!
Think about this, have you ever given your name, address and phone number to a stranger you met in a bar or on the street,? Well, there may be a few folks who have done this to someone in a bar, given some of their personal info. But in any case you should not do that in online dating.
If you are really interested in someone, then play it smart and safe. Be sure that you get to know the person first, before divulging sensitive private data. Of course, he could turn out to be Prince Charming, but on the other hand… There is a chance that he could use information you divulged to hurt or damage you. My advice is that you get to know the other person first through emails or other means the online dating site may offer.
If you find it difficult to obtain all the information about that person, then there are several websites which can help you out. These websites will help you to know the background about someone. These websites have got a different types of checks specifically designed to meet your needs.
Trust yourself, if you feel something is wrong, you’re probably right. Make a better decision… Check it out before you date them.
For more info, http://www.AssetSearchPros.com
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