Finance: Personal Another Perspective
Investments 11 Final
Questions & Answers
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Questions
1. How do I set up an investment account?
2. What is the difference between an ETF and an
Index Fund?
3. Where do I find the distributions for a
mutual/index/exchange traded fund?
4. Can you have a sleep-well portfolio with an
actively managed fund?
5. Where do I find current performance data
once I leave BYU?
1. How Do I Set Up an Investment
Account?
There are many different ways to set up an
investment account
You can do this with a mutual fund company, a
bank, or other financial services company
Remember one key objective is to minimize
costs including transactions costs
Generally, I select which no-load mutual funds I
want to purchase first, and then go directly to the
mutual fund company or brokerage house and
purchase the mutual fund shares through them
I make sure the mutual fund company is
Quicken compatible, i.e., I can use Quicken to
update my holdings and track changes
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Setting Up an Account (continued)
There are four parts to setting up an online
account:
1. Select your Account Type
Is this for retirement or for general investing? If
retirement, is it a Roth or traditional IRA, SEP
or SIMPLE?
If general investing, what kind of securities will
you be investing in? (mutual funds, stocks
bonds)
Once you determine your account type, you will
need your social security number, your birth date,
email address, and your home address to begin
filling out the forms
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Setting Up an Account (continued)
2. Select your investments
Here is where you select from the available mutual
funds and other assets from the mutual fund
company
Make sure you have sufficient funds for the
initial investment
Check to see if they charge for accounts under a
certain dollar amount of assets
Make sure you have enough for this
minimum purchase amount
Select the funds and the dollar amounts
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Setting Up an Account (continued)
3. Select your funding method
How will you get your money to the mutual fund
company or brokerage account
A. Write a check
You can write a check and mail it in
B. Electronic bank transfer
You can give them your bank account
number and your bank routing number, and
they can take the money out of your account
C. Bank wire
You can have your bank wire the funds to
the mutual fund company
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Setting Up an Account (continued)
4. Review and finalize your information
Review your information for correctness
Electronically sign or print your application
Sign up for online access
Prepare to connect to the mutual fund company
through Quicken to monitor account and
individual asset performance
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Setting Up an Account (continued)
Once you have done these things, you are set
up (initially). Now:
Set up Quicken to track your mutual funds by asset
class each week
Watch your investment asset allocation to make
sure you are within your target percentages
If it is not an index fund, make sure you can
compare performance versus benchmarks each
month, quarter and each year to make sure the
mutual fund managers are adding value (i.e.,
performing better than the benchmarks after costs
and fees)
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2. What is the Difference between an
Index Fund and an ETF?
What is the difference between an Index Fund
ETF (Exchange Traded Fund) ?
An index fund is a mutual fund that tracks an index,
commodity or basket of assets
Its price is determined only once a day at the
end of the trading day, and it can only be
purchased or sold once per day
An ETF is like an index fund. It tracks an index,
commodity or basket of assets
However, its price changes every minute
throughout the day as ETFs are bought and sold
just like an individual share or bond throughout
the day
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ETF versus Index Funds (continued)
Action
Trades like a stock
Has transaction costs to trade *
Generally lower management fee
Trades once a day
No cost to buy and sell (no load)
Slightly higher management fee
ETF IF
x
x
x
x
x
x
Notes:
* Some brokerage houses may trade ETFs without a fee,
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ETF versus Index Funds (continued)
When would I choose an Index Fund over an
ETF (and vice versa)?
If you will be putting in a small amount each month
into a Fund, the Index Fund is the better way to go
due to no transactions costs (an though even the
management fee is slightly higher) to buy or sell
If you are investing a specific (and large) amount
just once, and will be keeping it in for a long time,
the ETF is cheaper, due to lower management fees.
You do have transactions costs to get in and out,
though
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3. Where Do I Find Data on
Mutual Fund Distributions?
There are a number of places you can find
distributions for your mutual fund
Mutual Fund Websites
Vanguard, Fidelity, American Funds, Schwab,
etc. all have their mutual fund prospectus on
their websites
Most will give you the dates and amounts of
their fund distributions
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Mutual Fund Distributions (continued)
Financial Data Providers are other good sources.
Realize this is secondary data thoughthey get it
from the mutual fund providers
YahooFinance is a good sources. If you go to
http://finance.yahoo.com, put in your mutual
fund ticker, click on Historical Prices, and
Dividends Only, and you will get a history of
distributions
However, it does not tell you which
distributions are ordinary, stock, or capital
gains distributions
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Mutual Fund Distributions (continued)
How do I get the distributions?
1. Find the alpha code or ticker for the mutual
fund?
It is the 4 or 5 digit code that is specific to each
mutual fund
2. Access the financial market or mutual fund
company website
YahooFinance. Finance.Google.com,
Vanguard.com, fidelity.com, bloomberg.com
etc.
3. Put in the alpha code or ticker
Look for the dividends or distributions
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Mutual Fund Distributions (continued)
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Mutual Fund Distributions (continued)
Watch for when the Fund makes distributions
Try to purchase your Fund after they have made a
distribution, so you do not have to pay taxes on
money you just put into the Fund which was sent
out as a distribution
With VFINX, they make distributions quarterly,
near the end of each quarter. This is better than
Funds which make distributions once per year
Distributions are small, less than 1%, so timing
purchases for this Fund is not that important
As a rule of thumb, I generally try purchase the
shares after distributions are made and not too close
to the next distribution date
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4. Can You Have an Actively Managed
Fund in a Sleep-well Portfolio?
The key to adding actively managed funds in a
sleep-well portfolio is you!
1. Do you think the Fund and manager will
continue to outperform the benchmark over time?
2. Do you think the Fund and manager be around
for the next 5-20 years?
3. Do you think the Fund will continue to offer the
benefits for which you bought it in the first place,
i.e., good performance, positive tracking error, low
cost, good manager tenure, tax efficiency, low uninvested cash, no style drift, etc.
4. Are you are willing to watch Fund performance
versus benchmarks?
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Actively Managed versus Index Fund?
If you think the Fund and manager will continue to
outperform over the long term, you can include it in
your portfolio
However, watch performance carefully
However, if it does begin to underperform
versus the benchmarks over a 24-36 month
period, be willing to admit mistakes and do
what is necessary for your portfolios well being
sell it out and buy another fund that will at
least match the index (i.e., an index fund)
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5. Where do I find Performance Numbers
for Mutual Funds and Stocks and Bonds?
Performance numbers can be found a number of
places, particularly online and in paper publications
1. Mutual Fund Performance Benchmarks
I generally like to get a Wall Street Journal for
the first day after the end of the month or
quarter
They will give performance by Lipper
Category which will show how the average
fund in that asset class performed
Large cap blend, value and growth
Small cap blend, value and growth
Short-term bond, long-term bond
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1. Mutual Fund Benchmarks (Lipper)
From WSJ, 11/1/2010, page R9:
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Stock and Bond Benchmarks
2. Stock and Bond Benchmark performance
I also like the WSJ
They give the performance of major stock
and bond benchmarks
S&P 500 Index (large cap)
Russell 2000 (small cap)
MSCI EAFE (international
MSCI Emerging Markets Free
Barclays Aggregate
Barclays Muni
B of A High Yield
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Stock and Bond Benchmarks (continued)
From WSJ, 11/1/2010, page R9:
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