Jeremy Fulton, Financial Wellness Coach

Tag: stock market

  • Mutual funds; the good, the bad, and the ugly

    Mutual funds; the good, the bad, and the ugly

    First things first, what on earth is a mutual fund?  If you remember, I said that I recommend investing in them as part of your investment portfolio.

    According to Investopedia.com, a mutual fund is:

    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.

    In simple-speak, a bunch of people pool their money with a professional fund manager to take advantage of opportunities not normally available to small investors.

    Like all things in life, there are pros & cons to investing in mutual funds.

    The Good

    • Diversification – your invested money is spread among several stocks.  This is the opposite of “keeping all your eggs in one basket.”  If one company does poorly, the effect on you is limited.
    • Professional management – most people (myself included) don’t have the time to evaluate, in depth, all that should be evaluated in a stock before buying it.  The fund manager’s only job is to maximize performance of the fund, by picking good stocks.
    • Economies of scale – since the fund manager is buying huge amounts of stocks at a time, the transaction fees are much lower than for you or me.
    • Mutual funds are liquid assets – they are easy to convert to cash, unlike real estate or bonds.
    • Simplicity – investing in mutual funds can be as simple as an automatic bank draft, payroll deduction, or buying from the fund’s website.
    • Variety – If there is a sector, stock style, social impact, or any other area you want to invest in, there is a mutual fund for you.  In fact, there are more mutual funds than stocks!

    The Bad

    • Professional management – Not all managers do as well as they should.  Just because the fund is professionally managed, doesn’t mean it performs well.  Look at the manager’s track record, along with the funds track record before investing in it.
    • Over diversification – if the fund has too many stocks, a great performance by one or a few might have minimal effect on the overall fund value.
    • Taxes – all capital gains taxes are passed on to the investors.  If the fund is churned a lot (the manager buys and sells the fund assets a lot), investors could be liable for more capital gains taxes.  You can look at the fund’s turnover rate, or having the funds as part of a tax-preferred account such as an IRA or 401(k).

    The Ugly

    • Fees – Fund managers have to be paid.  There are costs associated with the administration of the funds.  There is no such thing as a free lunch!  Fees, referred to as expense ratios, can range from as low as 0.2% for some index funds, to over 2%!  The fees will be listed in the fund’s prospectus.  These take away from the fund’s overall performance, so look carefully at them.  Another fee to be aware of is a sales charge (load).  This is how some advisers get paid (think commission on sales); there are many different ideas on the value of advisers and what the best fee structure is (I won’t go into it here), but I will say is that a good adviser is worth his/her compensation.  With loads, the more you invest in one fund company, the lower they are, and at some point they usually go away.  If you pick a low fee fund and invest regulatory, you may end up paying less in fees than you would buying several different stocks each month on a self service site (up to $9/trade).

    Final Thoughts

    It’s important to know the details of a fund before deciding to invest in it.  A quality adviser will teach you why he/she recommends a particular fund or group of funds.  They will help you pick funds that have a low expense ratio, a good track record of performance over the long term, and are appropriate for your needs.  Mutual funds are a great investment tool for average Joes like us!

    If you are ready to start investing, I can put you in touch with a qualified investment adviser who has the heart of a teacher!  If not, I can get you ready.  Contact me today:

    jeremy.fulton@me.com
    860-469-2278

  • Should you should KISS your investment strategy?

    Should you should KISS your investment strategy?

    You know what K.I.S.S. stands for

    Keep It Simple Silly

    And you thought I was going to insult you!

    We’ve both heard that “serious investors” have complicated and advanced investing products and strategies which enable them to make more than us mere mortal investors.

    • Hedge Funds
    • REITs
    • High Yield Bonds
    • FOREX trading
    • Commodities
    • Penny Stocks
    • Etc, etc, etc

    I will admit that there is potential that someone could make a lot more with these. There is also the potential that you could loose it all!

    I have one overriding investment philosophy that I teach my clients:

    Never invest in anything you don’t understand well enough to teach it to someone else.

    Think about it; if you have a thorough understanding of your investments, how they work in the market, and what makes them ‘go up’ or ‘go down’ then you are a lot less likely to panic and worry when the Dow Jones dips. In fact, you might even see a silver lining in market drops!

    It is possible to learn all the ins-and-outs of the more complex investments, but what will it gain you? Do you have the time and desire to become an expert? Or the time and desire to manage those investments?

    I’ve been trained in all that stuff (through the Certified Financial Adviser program) and I could teach you a lot of it, but I still don’t have a “sophisticated” investment strategy.

    Because I don’t have the time to manage my portfolio every day and want to keep my risk to a manageable level, while taking advantage of the long term growth of the market, I stick with mutual funds.

    Mutual funds are easy to understand, have high diversification (my eggs are in lots of different baskets), and are easy to invest with. I even invest in mutual funds that cover different market sectors to increase my diversification even more! (If you are not sure what a mutual fund is, please ask!)

    Boring? Yes. Simple? You bet! Do I know enough to teach you how they work? Of course! Give me a call and I’ll teach you today! Then you, too, can have confidence in your investments!

    What are your thoughts?

  • What is a Stock?

    Stocks, bonds, Wall Street, investing, stock brokers, mutual funds, commodities, futures, options, and hedge funds; words we’ve all heard on the nightly news, TV shows, movies, and radio talk shows.  Do you really understand what they all mean, not just what popular culture says they are?  If not, you are in the majority of Americans.  Most people have never been taught much, if anything about them, and are content to grab bits and pieces of info from the news and political pundits, or maybe they just watched the movie “Wall Street.”

    But that’s not you; you are here trying to learn something, to expand your understanding of all things relating to Personal Finance.  Today I’ll do my best to explain a bit about Stocks.

    A stock is a share of ownership in a corporation.  The owner of a share of stock is a part owner of a company.  Yes, you can own (part of) Home Depot!  If a company has 100,000 shares of stock, each share represents 1/100,000 ownership of that company.  Most major corporations that are household names have many more than 100,000 shares; Home Depot has about 1.38 Billion!

    Because the stock represents ownership of a company, its value is based on the value of the company (I won’t go into stock valuation techniques here, it’s complicated enough to take a semester long college course to teach).  As the market values the company more or less (usually due to the company’s performance), the value of the stock increases or decreases, respectively.

    One way stock investors earn money is by the rise of the value of the stock (it’s ‘return’).  Another way is through dividends.  When a company makes a profit and decides to share it with it’s owners (stock owners), it pays out dividends.  The amount an investor receives is based on the number of shares he or she owns.

    That is basically what a stock is, pretty simple, right?  If you want to know a basic history of the stocks and the stock market, and what a stock market is, this short article on Investopedia.com  is written without a lot of industry jargon.

    Please let me know what you think of this post: was it too long, too short, too basic, too in-depth, etc.  Also, if you have any questions, post them below and I’ll respond with the answer!