Mutual fund fundamentals

           Mutual fund fundamentals

Mutual funds offer a simple way to diversify your portfolio - albeit at a cost

The theory behind mutual funds is simple: you need the advantage of being able to pool your money together with that of a lot of other investors. Then, a professional manager can invest that money across enough investments to reduce the risk of being wiped out by any single bad bet.

That's how a mutual fund operates. The fund is essentially a corporation whose sole business is to collect and invest money. You join the pool by buying shares in the fund. Your money is then invested by a team of professionals, who research stocks, bonds or other assets and then place the money as wisely as they can.

The managers charge an annual fee -- generally 0.5% to 2.5% of assets -- plus other expenses. That puts a drag on your total return, of course. But in exchange, you get professional direction and instant diversification, factors that have helped propel the number of funds to 7,600 in 2010, according to the Investment Company Institute

There are several flavors of mutual funds. Funds that impose a sales charge -- taking a cut of any new money that comes into the fund, or a cut of withdrawals -- are called load funds; those that do not have sales charges are called no-load funds.

Funds can also be divided into open- and closed-end funds. Open-end funds will sell shares to anyone who cares to buy; essentially, they are willing to invest any new money that the public wishes to pump into the fund. Their share price is determined by the value of the underlying investments and is calculated anew each evening after the close of the U.S. markets. Closed-end funds, on the other hand, issue a limited number of shares that then trade on the stock exchange like stocks. The price of such shares can fluctuate above or below the actual value of the underlying shares held within the portfolio.

Index funds

When people talk about the long-term performance of stocks, they're usually talking about the Dow Jones industrial average, the Standard and Poor's 500-stock index, or some other broad market index. Funds based on the S&P 500, by definition, will never outperform the market. But because they are so cheap to run -- you'll typically pay just $2 a year in expenses for every $1,000 invested compared to $14 a year for the average stock fund -- they outperform the vast majority of actively managed funds over time.

Growth funds

These invest in the stock of companies whose profits are growing at a rapid pace. Such stocks typically rise more quickly than the overall market -- and fall faster if they don't live up to investors' expectations.

Value funds

Value-oriented fund managers buy companies that appear to be cheap, relative to their earnings. In many cases, these are mature companies that send some of their earnings back to their shareholders in the form of dividends. Funds that specifically target such income-producing investments are often called equity-income or growth-and-income funds.

Sector funds

Sector and specialty funds concentrate their assets in a particular sector, such as technology or financials. There's nothing wrong with that approach, as long as you remember that a hot performing sector one year could crash the following year.

Others

Since there is a lot of overlap in the stocks held in each of these fund types, you'll need to branch out to get any kind of meaningful diversification. That's where the more aggressive funds, like aggressive growth funds, capital appreciation funds, small-cap funds, midcap funds, and emerging growth funds, fit in. Typically, these funds, which tend to be more volatile than large-cap funds, pursue one or more of the following strategies:

- Invest in smaller companies, where earnings aren't as reliable as at bigger firms but where the potential for gains (and losses) is higher.

- Invest in pricey, high-growth stocks.

- Invest in stocks that are in "hot" industries, such as technology or health care.

- Invest in just a handful of companies.

International

Funds that invest outside the U.S. come in three basic flavors. The first, international funds, typically buy stocks in larger companies from relatively stable regions like Europe and the Pacific Rim. Global funds do likewise, but they can also invest heavily in the United States. Emerging market funds invest in riskier regions, like Latin America, Eastern Europe and Asia.

Investing your money basics

Investing your money basics

1.Over the long term, stocks have historically outperformed all other investments.

Stocks have historically provided the highest returns of any asset class -- close to 10% over the long term. The next best performing asset class is bonds. Long-term U.S. Treasurys have returned an average of more than 5%.

2. Over the short term, stocks can be hazardous to your financial health.

On Dec. 12, 1914, stocks experienced the worst one-day drop in stock market history -- 24.4% . Oct. 19, 1987, the stock market lost 22.6%. More recently, the shocks have been prolonged and painful: If you had invested in a Nasdaq index fund around the time of the market's peak in March 2000 you would have lost three-fourths of your money over the next three years. And in 2009, stocks overall lost a whopping 37%.

3. Risky investments generally pay more than safe ones (except when they fail).

Investors demand a higher rate of return for taking greater risks. That's one reason that stocks, which are perceived as riskier than bonds, tend to return more. It also explains why long-term bonds pay more than short-term bonds. The longer investors have to wait for their final payoff on the bond, the greater the chance that something will intervene to erode the investment's value.

4. The biggest single determiner of stock prices is earnings.

Over the short term, stock prices fluctuate based on everything from interest rates to investor sentiment to the weather. But over the long term, what matters are earnings.

5. A bad year for bonds looks like a day at the beach for stocks.

In 1994, intermediate-term Treasury securities fell just 1.8%, and the following year they bounced back 14.4%. By comparison, in the 1973-74 crash, the Dow Jones industrial average fell 44%. It didn't return to its old highs for more than three years or push significantly above the old highs for more than 10 years.

6. Rising interest rates are bad for bonds.

When interest rates go up, bond prices fall. Why? Because bond buyers won't pay as much for an existing bond with a fixed interest rate of, say, 5% because they know that the fixed interest on a new bond will pay more because rates in general have gone up.Conversely, when interest rates fall, bond prices go up in lockstep fashion. And the effect is strongest on bonds with the longest term, or time, to maturity. That is, long-term bonds get hit harder than short-term bonds when rates climb, and gain the most when rates fall.

7. Inflation may be the biggest threat to your long-term investments.

While a stock market crash can knock the stuffing out of your stock investments, so far -- knock wood -- the market has always bounced back and eventually gone on to new heights. However, inflation, which has historically stripped 3.2% a year off the value of your money, rarely gives back what it takes away. That's why it's important to put your retirement investments where they'll earn the highest long-term returns.

8. U.S. Treasury bonds are as close to a sure thing as an investor can get.

The conventional wisdom is that the U.S. government is unlikely ever to default on its bonds - partly because the American economy has historically been fairly strong and partly because the government can always print more money to pay them off if need be. As a result, the interest rate of Treasurys is considered a risk-free rate, and the yield of every other kind of fixed-income investment is higher in proportion to how much riskier that investment is perceived to be. Of course, your return on Treasurys will suffer if interest rates rise, just like all other kinds of bonds.

9. A diversified portfolio is less risky than a portfolio that is concentrated in one or a few investments.

Diversifying -- that is, spreading your money among a number of different types of investments -- lessens your risk because even if some of your holdings go down, others may go up (or at least not go down as much). On the flip side, a diversified portfolio is unlikely to outperform the market by a big margin.

10. Index mutual funds often outperform actively managed funds.

In an index fund, the manager sets up his portfolio to mirror a market index -- such as Standard & Poor's 500-stock index -- rather than actively picking which stocks to purchase. It is surprising, but true, that index funds often beat the majority of competitors among actively managed funds. One reason: Few actively managed funds can consistently outperform the market by enough to cover the cost of their generally higher expenses.

How To Get a Pay Raise

How To Get a Pay Raise

Do you feel underpaid? Are you thinking about asking your boss for a raise? To increase your chances of success, it's important to know what your job is really worth and how to effectively approach your boss about a salary increase. Many employees make the mistake of asking for a raise because they need more money, can't pay their bills, etc. Your personal budgeting and financial problems are not your company's problem.

Need has nothing to do with it, so it's best not to talk about need when asking for a raise. Base your request on your evaluation of your skills, productivity, job tasks, your contribution to the company, and the going rate, both inside and outside the company, for what you do. Look at the entire situation from your company's perspective, and base your approach on THEIR needs, and on what YOU can do for THEM.

The first step is to evaluate your skills and your job description, both your formal written job description, if there is one, and the tasks you do that may not be part of your formal job description.

Gather copies of your last few performance evaluations, if your company does written reviews. Concentrate on showing/reminding your boss of your tangible contributions to the company. Make a list of your accomplishments, and if possible, the dollar value of each to the company. For example: "I saved the company $20,000 this year by researching and negotiating contracts with new vendors."

When comparing and analyzing salaries, it's important to consider the financial value of your benefits and perks. If your company pays for all or part of your health insurance, this is as good as money in your pocket. The same is true of a 401(k) match, tuition assistance (if you're taking college courses), etc.

Dos and Don'ts of Asking For a Raise

First, find out your company's policy on salary increases. Are all employees reviewed at the same time each year and are raises given only at that time? Is there a budgeted amount that your department must stay within for each employee and the department as a whole? For the highest chance of successfully getting the raise you want, you have to know the company's policies regarding compensation. If your boss has no authority to exceed the budgeted amount handed down from higher ups, you may have wasted your time and effort.

Know what you're asking for. You don't have to state what it is up front, but you should have a good idea of the amount you'd find acceptable and be able to defend it.

Be aware of your company's financial state. Are they struggling to stay afloat? In a budget crisis? If so, your chances of getting that raise are not good. Not all companies are in a position to raise salaries. However, they may be able to offer you additional benefits instead, such as extra paid leave, tuition assistance, stock options, overtime, etc., or a promotion, if one is warranted.

Don't give ultimatums. This just puts your boss on the defensive, and may put you in the position of either quitting your job or eating crow. Your goal is to convince your boss that you're worth more money because you do an exceptional job and perhaps that you've taken on additional responsibility that warrants a higher salary or promotion.

Timing is everything. Ask your boss for an appointment at a time that is good for him or her. Don't schedule your discussion for a Monday morning or a Friday afternoon, as these are busy times for most people. Don't schedule it during your boss' busiest time of month. Try to pick a time when your boss won't be distracted and pressured by deadlines, if possible.

If, after all this, you don't get the raise you realistically deserve, DON'T respond with sour grapes. Ask your boss what you'd have to do to receive an increase, or a promotion accompanied by a pay adjustment and then renew your efforts to improve your performance. Make sure your boss is aware of what you do and how well you do it, and document your accomplishments in preparation for your next opportunity to discuss salary.

The Keys to Financial Success

The Keys to Financial Success

Although making resolutions to improve your financial situation is a good thing to do at any time of year, many people find it easier at the beginning of a new year. Regardless of when you begin, the basics remain the same. Here are my top ten keys to getting ahead financially.

1. Get paid what you’re worth and spend less Than You Earn

It sounds simplistic, but many people struggle with this first basic rule. Make sure you know what your job is worth in the marketplace, by conducting an evaluation of your skills, productivity, job tasks, contribution to the company, and the going rate, both inside and outside the company, for what you do. Being underpaid even a thousand dollars a year can have a significant cumulative effect over the course of your working life.

No matter how much or how little you're paid, you'll never get ahead if you spend more than you earn. Often it's easier to spend less than it is to earn more, and a little cost-cutting effort in a number of areas can result in big savings. It doesn't always have to involve making big sacrifices.

2. Stick to a Budget

One of my favorite subjects: budgeting. It's not a four-letter word. How can you know where your money is going if you don't budget? How can you set spending and saving goals if you don't know where your money is going? You need a budget whether you make thousands or hundreds of thousands of dollars a year.

3. Pay Off Credit Card Debt

Credit card debt is the number one obstacle to getting ahead financially. Those little pieces of plastic are so easy to use, and it's so easy to forget that it's real money we're dealing with when we whip them out to pay for a purchase, large or small. Despite our good resolves to pay the balance off quickly, the reality is that we often don't, and end up paying far more for things than we would have paid if we had used cash.

4. Contribute to a Retirement Plan

If your employer has a 401(k) plan and you don't contribute to it, you're walking away from one of the best deals out there. Ask your employer if they have a 401(k) plan (or similar plan), and sign up today. If you're already contributing, try to increase your contribution. If your employer doesn't offer a retirement plan, consider an IRA.

5. Have a Savings Plan

You've heard it before: Pay yourself first! If you wait until you've met all your other financial obligations before seeing what's left over for saving, chances are you'll never have a healthy savings account or investments. Resolve to set aside a minimum of 5% to 10% of your salary for savings BEFORE you start paying your bills. Better yet, have money automatically deducted from your paycheck and deposited into a separate account.

6. Invest!

If you're contributing to a retirement plan and a savings account and you can still manage to put some money into other investments, all the better.

7. Maximize Your Employment Benefits

Employment benefits like a 401(k) plan, flexible spending accounts, medical and dental insurance, etc., are worth big bucks. Make sure you're maximizing yours and taking advantage of the ones that can save you money by reducing taxes or out-of-pocket expenses.

8. Review Your Insurance Coverages

Too many people are talked into paying too much for life and disability insurance, whether it's by adding these coverages to car loans, buying whole-life insurance policies when term-life makes more sense, or buying life insurance when you have no dependents. On the other hand, it's important that you have enough insurance to protect your dependents and your income in the case of death or disability.

9. Update Your Will

70% of Americans don't have a will. If you have dependents, no matter how little or how much you own, you need a will. If your situation isn't too complicated you can even do your own with software like WillMaker from Nolo Press. Protect your loved ones. Write a will.

10. Keep Good Records

If you don't keep good records, you're probably not claiming all your allowable income tax deductions and credits. Set up a system now and use it all year. It's much easier than scrambling to find everything at tax time, only to miss items that might have saved you money.

How to Choose a Financial Planner

How to Choose a Financial Planner 

You spend a lifetime working hard and saving for goals like buying a house, retiring and sending your kids to college. Most experts recommend hiring a financial adviser to help you reach those goals, yet how do you find someone you can trust?

Financial planners advise clients on how best to save, invest, and grow their money. They can help you tackle a specific financial goals such as readying yourself to buy a house or give you a macro view of your money and the interplay of your various assets. Some specialize in retirement or estate planning, while some others consult on a range of financial matters.

Don’t confuse planners with stockbrokers the market mavens people call to trade stocks. Financial planners also differ from accountants who can help you lower your tax bill, insurance agents who might lure you in with complicated life insurance policies, or the person at your local Fidelity office urging you to buy mutual funds.

Stick with the professionals.

Check the certificate. Anyone can hang out a shingle saying they're a financial planner or a wealth manager. Stick with someone who has a well-known designation such Certified Financial Planner or Personal Financial Specialist. Whatever the designation, be sure to understand what type of education and enrichment it required. Don't be afraid to ask them to explain the duck soup of letters after their names, and where they got their training.

We all have different needs.

Know what you need. Not all planners offer comprehensive advice. Some focus on retirement, while others go whole-hog and cover everything from taxes to estate planning. Decide what you need and expect from your adviser.

Know what they actually do. Some financial advisers are actually tax accountants or insurance salesmen who decide to offer general investment advice to broaden their businesses. Consider their other incentives when they start to sell you a new tax strategy or insurance policy.

Interview, interview, interview. When hiring a planner, interview at least three pros. Don't shy away from asking them for referrals from clients and don't fall in love with the first one you meet even if he was recommended by your best friend.

Understand how your adviser gets paid.

Find the fees. Some advisers are called "fee-only" financial planners because they don't receive commissions for any of the products they sell. Commission-based planners might not charge clients for office visits, but they receive compensation from the companies whose products they sell. Some financial planners have a hybrid fee structure. So-called "fee-based" planners can receive payments for some of the investment products they sell from the companies that created them, but most of their income derives from the fees they charge their clients. True fee-only planners are a relatively rare breed, so be sure to ask how an adviser is paid.

Understand the products. Ask about the breadth of products that the planner sells and if the compensation is different, say, for insurance products versus investments. Similarly, be wary of advisers who tend to push a narrow selection of products, for example, if they keep steering you toward one mutual fund family. No fund company offers the best funds in every style of investing.

Running a background check on your planner. Start with these two questions: Have you ever been convicted of a crime? Has any regulatory body or investment-industry group ever put you under investigation, even if you weren't found guilty or responsible? Then ask for references of current clients whose goals and finances match yours.

What not to do.

Don't jump the gun. Just because you are offered a product or plan by the adviser you choose, doesn't mean you should buy the first investment product that the adviser offers. Advising is part of a conversation, so be sure to talk it out without asking about alternatives.

Don't be wowed by performance. Fancy charts and presentations play up an investment's performance should be understood for the market or time period. The investment may actually have under-performed, but still makes for a good chart!

Don't forget to check in. Be sure to set regular meetings with your adviser to make sure that your plan still fits with your goals. Regular, for some people, may mean just once a year at tax time; for others, quarterly is more appropriate.

When is the Right Time to Retire?

When is the Right Time to Retire?

Once we reach our 60s, most of us will begin to consider retirement. Some people may feel the need to exit the busy and often stressful business world, while others are full of creative ideas about what to do with newly available free time. Perhaps you're also ready to relax, take it down a notch and savor peace and quiet each day. These visions of retirement can be compelling reasons to finally exit the workforce.

But before we can begin our second act, we have an important decision to make. We need to commit to a time and date to pull the trigger and commence retirement. This important decision will impact the rest of your life. Here's how to decide when it's the right time to retire:

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Examine your financial resources.

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The first and most obvious duck to have in a row when picking a retirement date is having sufficient financial resources to allow you to meet your obligations and provide sufficient leeway to live the retired life you want. You want to have enough money to pay the bills and still have fun. Without this prerequisite, retiring from the working world is not the soundest of decisions to consider.However, once you feel you will be able to live off the income generated by your savings and investments, it is not necessarily the right time for you to retire. There are other considerations that might improve your odds of realizing a truly fulfilling retirement.

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Develop a plan.

For the next 20 or more years, you will be living this new chapter of your life. You need to develop a plan for how you will spend your time. Decide whether you want to relax and take it slow or fill your days with new and exciting activities. It can be helpful to your planning if you have an understanding of what you will do each day after you no longer go to work.

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Coordinate with your spouse.

Whether your significant other is already retired or still working, things will change when you retire. If your spouse is already retired, your presence will be felt 24/7 and you will need to integrate yourself into your spouse's world. It would be inconsiderate to expect your spouse to drop everything to accommodate you. The two of you can best get through this transition by trying to communicate openly, giving each other space to pursue individual interests and being patient. Try to be sensitive to each other's point of view. You have many years left together, so make the effort to get it right. It will be well worth it in the long run.

Schedule enough to do.

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Twenty years of retired life is a long time to just relax. Can you enjoy your day if there is nothing on the schedule, just relaxing in the moment? Decide whether your current collection of interests and hobbies will be enough to keep you busy. For most people retirement will be a combination of engagement and relaxation. The appropriate proportion depends on your personal tastes. If you are someone who is happiest when you have activities and projects, it can help to dedicate some time prior to retirement to defining what those may be once you retire.

Education Fee Planning – Investing in your children’s Future.

Education Fee Planning – Investing in your children’s Future.

College is an investment in your children or grandchildren for a lifetime. It can open the door to a world of opportunity. With the cost of a college education continuing to increase, saving, even a little at a time, can make a big difference. The key is to save what you can, and to invest early and often.



Education Fee Planning

Most parents want the best start in life for their child. Of all the benefits you can provide, none has a more lasting value than a good education at a school or university where your son or daughter will be happy and successful. And in today’s increasingly competitive world, where higher education is seen as the key to success, it is natural that we should want our children to make the most of their learning opportunities.

However, school and university fees have steadily risen over the years and the cost of good education can now be a major expense. Therefore, planning in advance to make sure you have adequate funds to meet these costs makes economic sense, especially if you have more than one child. Making the right financial arrangements today will mean that the decision whether to go on to higher education can be decided on ability, not financial standing.

Similarly, your future net disposable income could be significantly diminished by a heavy school fee commitment and you may have to compromise your own financial goals or lifestyle. However, planning in advance can mean financial freedom for yourself whilst at the same time providing an excellent start in life for your child.

Not everyone has the disposable income to start planning immediately so you can elect to choose a low start option. This allows you to get a plan in place and the option of increasing the amount later when your circumstances allow. It is worth obtaining a detailed quotation so you can see if you are above or below the right level of saving. Most expatriates will save more when they are overseas and then reduce the amount should they return to a taxable environment or one offering less salary.

There are also ways of reducing your tax exposure which is covered in our Trust section. The Education plan can be established in Trust to reduce tax exposure with the College/School requesting the fees directly from the Trustees and not you as the individual. Similarly, a Trust can ensure that the asset is used for the benefit of the children in the event of your demise and not frittered away from the benefit of the intended beneficiaries.

The sooner you realise the inevitability of school and higher education fees, the sooner you can start planning for them financially!