For further information on this topic, please read "Unit 6: Mutual Fund Investing" in the Investing for Your Future learning lesson.
NOTE: This transcript is from an online, live chat. The major topics have been captured in the material below. If you have further questions, please search eXtension for more in-depth and detailed information.
Topic: Mutual Funds
Chat Date: May 7, 2008
Number of Participants: 29
Moderator: Welcome to our Chat on Mutual Funds. Hi! I’m Liz Gorham (South Dakota State University), your moderator for today’s chat along with our technician, Erik Anderson (University of Idaho). Today’s chat, which will last one hour, is sponsored and supported by members of the Financial Security for All Community of Practice. Our team of experts, responding to your questions, are Dr. Barbara O’Neill, Rutgers University; Dr. Celia Hayhoe, Virginia Tech; and Dr. Michael Gutter, University of Florida. After the end of the chat, you will receive an email asking you to complete the evaluation survey for a drawing of prizes to be awarded. You will also receive notice when a transcribed copy of this chat can be viewed on the eXtension Website. While we are waiting for more participants to join us, please respond to the survey question on the screen.
Moderator: Thank you, your response to the pre-assessment survey question, “Do you own any mutual funds?” is duly noted (89% “Yes” and 11% “No” to having mutual funds).
DIVERSIFICATION OF MUTUAL FUNDS
Question: How can you make sure you are well diversified with mutual funds? Is there a good website or tool available that you can recommend?
Answer: Morningstar has a feature called Portfolio X-ray on its Web site that shows the overlap of funds in a portfolio. The URL for Morningstar is http://www.morningstar.com/cover/funds.aspx. (Note: there is a fee for this service after the 14-day trail free period; find the Portfolio X-ray link by scrolling down to the bottom right-hand corner of the Website.)
Question: Would you recommend that investors seek good diversification within one fund family or select mutual funds from a variety of sources? Adam Boldt of the Money Store, a weekly radio program suggests the use of multiple sources. He also raises the question of paying a firm a 1-2% of assets fee versus doing it yourself.
Answer: You need to be careful when buying a lot of different funds. Often, there is lots of overlap and you end up with a portfolio akin to an index fund but with the much higher expenses of actively managed mutual funds.
RETIREMENT PREPARATION – ROLLING OVER MUTUAL FUNDS
Question: My mutual funds are in a government Thrift Savings Plan and matched. I will retire soon and am not sure if I should roll them into something else.
Answer: You have the option of rolling your money into an IRA or taking a distribution. Contact your Human Resources person for more information.
Question: I've been investing in mutual funds for a number of years for my retirement. How do I turn those mutual funds into an income stream when I retire?
Answer: You can cash them in to buy an annuity or set up a regular withdrawal plan with the mutual fund company. You can use a financial calculator to get an idea of how long the money will last.
Question: Can mutual funds be rolled over into real estate?
Answer #1: Well, there are some mutual funds that invest in real estate. In addition there are Real Estate Investment Trusts (REITs). These are managed portfolios focusing on commercial property [e.g., office buildings, stores, apartment buildings] or the lending side of real estate. However, if you have existing mutual funds, once liquidated, you could do whatever you wanted with the money.
Answer #2: If the funds are in a deferred account like as Individual Retirement Account (IRA), the trustee may limit [the types of investments] that you can invest in.
Answer #3: Remember that, any time you move money from one investment to another outside of retirement accounts, there is a taxable event [i.e., a capital gain or loss].
Question: Can you recommend good recent publications (2006 or later) about mutual funds?
Answer: The FINRA Investor Education Foundation has some good fact sheets that may be helpful for general information. Another good resource is the American Association of Individual Investors which publishes an annual mutual funds guidebook. Their Web site address is http://www.aaii.com
Question: Can you recommend a resource to help me determine asset allocations?
Answer: Morningstar and other rating services, along with magazines like Money and Kiplingers, have grids to help you with stock and bond ratings and with mutual fund ratings. However, to use true asset allocation, you have to invest in other asset classes, such as real estate or owning a business.
Question: Does anyone have good, tested mutual fund materials (outline and PowerPoint slides) for teaching [about mutual funds] face-to-face that they are willing to share?
Clarification: For which audience is this request?
Clarification: For adults, ages 35 years and over, with at least a high school degree.
MUTUAL FUNDS AS ANNUITIES
Question: What are the best "signs" that a mutual fund is actually an annuity?
Response: Are you talking about mutual funds in a retirement account like TIAA-CREF?
Clarification: I was working with a company doing classes for employees; their 401(k) plan offerings included some annuities.
Answer: You may want to ask the individual provider. However, the distribution terms for that fund may be helpful. In addition, I have often found that this is alluded to in the fund overview.
Question: Speaking about annuities, how can you evaluate mutual funds within annuities? Many don't seem to be rated by Morningstar or have a slightly different name.
Answer: Your best sources of information are the prospectuses for variable annuity subaccounts (e.g., stock fund, bond fund) and periodic reports from the annuity company. You can then compare them to the funds in Morningstar or other sources.
Question for Clarification: I don't find those very helpful. What do you focus on when looking at them?
Answer #1: You may also want to compare how the funds are doing with the Lipper and other averages.
Answer #2: Look at historical performance relative to market indices, fund expense ratios (expenses as a percentage of fund assets), and the objectives of the fund (relative to your personal objectives).
MUTUAL FUND SELECTION
Moderator: What kinds of questions are your clientele asking you [about mutual funds]?
Response: When I give a class, they usually want to know how to evaluate specific funds.
Question: Some load mutual funds outperform no-load funds. How can you decide if a load fund is a better choice, over the long term (i.e., five years or more), than a no load fund?
Answer: If it is a back-end or contingent deferred sales load, then you would want to consider the amount of time you plan to hold the investment [if you plan to hold it more than 6 or 7 years, this fee will usually disappear]. With a front end load, it is important to consider the size of the fund and how it performs relative to its Lipper average.
TEACHING STRATEGIES FOR MUTUAL FUNDS
Question: What teaching strategies have you found useful for getting new investors to understand and invest in mutual funds?
Answer #1: I teach how to read a prospectus. Everyone gets a copy of the SAME one and we review the key sections (e.g., fund objective, historical performance, fund expenses).
Answer #2: I bring in examples of prospectuses, reports, and explore Web sites like Morningstar.
Answer #3: You tell them to look at their goals and the time horizon of the fund; the type of fund and how it ranks with other funds in that category; and their risk tolerance compared to that of the fund. Most of this can be found in Morningstar.
Question: Barbara O'Neill, would you be willing to share your information on teaching “How to Read a Prospectus?”
Barbara O’Neill: Sure. It's on my Personal Finance class Web site as one of my class lectures. See http://rci.rutgers.edu/~boneill/ or e-mail me at firstname.lastname@example.org and I will send you the file.
Comment: I second Marilyn and Linda's requests! I have many people ask me for basic investing workshops.
Celia Hayhoe: I have a basic investing handout I can share. E-mail me at email@example.com.
Question: As a nationwide financial literacy strategy, does it make more sense to focus on teaching consumers about investing in mutual funds versus investing in individual stocks and bonds? (My thought is that mutual funds are a better starting point for new investors, some of whom might have the ability and inclination to use that experience to move on to the riskier demands of picking individual stocks and bonds, while most would not.)
Answer: Agreed. In fact, mutual funds are where most investors get started as investors, either on their own or as part of a retirement savings plan.
EXCHANGE TRADED FUNDS
Question: What is your opinion about ETF's [Exchange Traded Funds, which track an index but trade like stock] that versus mutual funds in general? What are some good Web sites to check out for ETFs?
Answer #1: Morningstar is a good place to look at various exchange traded funds and should allow you to easily compare them with mutual funds.
Answer #2: ETFs and index mutual funds are both very low-cost and well diversified investments. Mutual funds work best for regular deposits, such as 401(k) paycheck deductions and regular monthly deposits in an automatic plan. ETFs require a broker and work best for occasional lump sums. Question: Can a bond ETF minimize capital gains and losses?
Answer: You have more control as the EFT is usually not an actively managed fund so you don't have unwanted capital gains and you do have diversity.
INDIVIDUAL BONDS VERSUS BOND FUNDS
Question: When is it best to buy individual bonds vs. a bond mutual fund?
Answer #1: When you buy a mutual fund, you have no control over the buying and selling of the bond, so you can have gains and losses you did not plan for. When you buy an individual bond, you lose diversification but gain control over the timing of capital gains and losses or hold the bond to maturity to help eliminate the loss of principal.
Answer #2: Just to follow up on the bond issue, it is important to remember that one bond is not diversified. For most investors with limited capital, mutual funds will provide some diversification. Choosing funds over individual assets should also consider cost effectiveness and diversification.
Moderator: To those of you who have not yet asked a question, this is your opportunity to do so!! Do you have more questions that you are asked by your clientele?
RISK ADJUSTMENT MEASURES
Question: A question I get asked is, “Which is the best risk adjusted measure of performance - Sharpe Ratio, Jensen's Alpha, or Treynor’s Ratio? Why?”
Michael Gutter: I prefer the Sharpe measure since it uses Standard Deviation as its measure of risk. The others use the measure of Beta to estimate the risk of the portfolio. However, the use of Beta is only appropriate when the portfolio is diversified; this is an assumption of the measure which is based on the Capital Asset Pricing Model. This may not be an appropriate estimate for many small investors’ portfolio. Beta tends to be a limited measure of risk that accounts for the overall systematic risk of an asset. However, standard deviation is a better representation of overall portfolio risk.
Moderator: Are there resources for teaching or learning about mutual funds that you have or are needed?
SOURCES FOR TEACHING ABOUT MUTUAL FUNDS
Rob Weagley (Participant): We have a four-hour, "Safeguard Your Savings" program that we developed with the Investor Protection Trust (IPT) and the Missouri Secretary of State's office that we would be pleased share with others. It may, however, be a little too basic for your tastes.
Barbara O’Neill: Absolutely. Please send me information as soon as possible to review and send a link for others to access it. Thanks for your offer to share.
Rob Weagley: I should probably check with the IPT and the Secretary, before I follow-through. When I do, I'll send it to Barbara. She makes a good librarian.
Comment: Yes, to Rob and Barbara; “Safeguarding your Savings” for the basics will be helpful.
Comment: I could use as many resources as I can get--- the simpler, the better!
Comment: I would also like the teaching resources that we have discussed today. I agree that simpler would be better.
Answer: As a basic investing resource, don’t forget Investing for Your Future (IFYF). The link to this eXtension learning lesson is http://www.extension.org/pages/Investing_for_Your_Future. If you want the accompanying PowerPoint presentations (available on CD-ROM), including a class session on mutual funds, contact oneill@aesop,rutgers.edu.
OPPORTUNITY TO SHARE MORE ABOUT MUTUAL FUNDS
Request: If our panelists or others have successfully taught classes on mutual funds or investing, how about sharing your experiences at AFCPE or another national financial education conference?
Celia Hayhoe: I would be happy to take the lead with Michael and others to do something for AFCPE conference in November 2008.
CHAT OPERATION – PARTICIPANTS’ RESPONSE
Moderator: Please respond to the next survey asking you to rate your knowledge level about mutual funds [Participants’ Response: 11 % Very High; 7 % High; 53% Moderate; and 29% Low]
Moderator: Would you be more willing to ask a question on this chat if your name did not appear before your question?
Christine Olinsky (Participant): Having my name with a question is fine.
Judy Simonson (Participant): I don't mind having my name either.
Linda Law-Saunders (Participant): Nor do I.
Frances Goode-Rivera (Participant): I enjoyed knowing who asked questions and gave answers.
Moderator: Good! We like the personal touch and it helps us keep the chat organized to be able to direct responses to a particular person.
Moderator: Thank you for participating in this chat about Mutual Funds. By email, you will soon receive a survey about your experience with this chat. All who complete the survey will be entered in a drawing for prizes to be announced in the future. After editing the questions and answers, you will be able to find a transcribed copy of this chat online. You will be notified by e-mail of its location on the Web when it has been posted.
Comment: Thanks to the experts who served as resources for this chat. You're great!
Comment: Thanks, panelists, Liz and Erik!
Comment: Thanks for the information.
Comment: Yes, ditto!
Comment: Thank you for the experience!
Moderator: Our time for this chat session has elapsed. Thank you for chatting with us today. Have a great day and good bye!
Dr. Barbara O’Neill, Rutgers Cooperative Extension’s Specialist in Financial Resource Management
Barbara O’Neill has written over 1,500 newspaper articles and over 100 articles for academic journals, conference proceedings, and other professional publications. She is a certified financial planner (CFP®), chartered retirement planning counselor (CRPC®), accredited financial counselor (AFC), certified housing counselor (CHC), and certified financial educator (CFEd). Dr. O’Neill is the author of two trade books, Saving on a Shoestring and Investing on a Shoestring, and co-author of Money Talk: a Financial Guide for Women and Small Steps to Health and Wealth™. She is also a frequent presenter at professional conferences. Dr. O’Neill received her Ph.D. in family financial management in 1995 from Virginia Tech. She has received over two dozen awards for program excellence from national professional organizations and over $450,000 in grants to support her financial education programs and research. Her research interests include families experiencing financial distress, measuring the impact of financial education programs, and associations between health status and personal finances.
Dr. Celia Hayhoe, Family Financial Management Specialist with Virginia Cooperative Extension at Virginia Tech
Celia Hayhoe received her Ph.D. in Family and Consumer Resources, M.S. in Finance, and her B.S. in Education at the University of Arizona. Celia received her Certified Financial Planner® designation in 1986. In 2006, Dr. Hayhoe won the Outreach Award for the College of Liberal Arts and Sciences at Virginia Tech. In 2007, she received the Distinguished Service Award from the Association for Financial Counseling and Planning Education. Her research interests are college students’ use of credit and eldercare financial planning. She has authored three national programs: To Be a Have or Have Not: The Choice is Yours, Money Speaks: Helping Teens and Parent Communicate About Money and Protecting Your Retirement and Other Financial Information for Family Caregivers: What Every Adult Child Needs to Know. Dr. Hayhoe has authored many extension publications and well as refereed journal articles on personal finance topics. She has been interviewed by both the popular press and news media and is a past President of the Association for Financial Counseling and Planning Education.
Dr. Michael Gutter, Assistant Professor and Financial Management State Specialist, Department of Family, Youth, and Community Sciences, in the Institute for Food and Agriculture at the University of Florida
Michael Gutter's BS degree is in Family Financial Management and his PhD is in Family Resource Management from The Ohio State University with a specialization in Finance. The common theme that connects Gutter's Research, Teaching, and Outreach is helping households achieve financial security. This has involved research examining how socioeconomic status, financial education, personal psychology, and financial socialization are related to financial behaviors. In the context of this model, Gutter currently explores how financial education is related to financial behaviors and whether or not it is effective as a treatment resulting in improved financial decision making. This line of research has funding from the Great Lakes Higher Education Guaranty Corporation, the National Endowment for Financial Education, and the NASD Investor Education Foundation.
Dr. Elizabeth Gorham, South Dakota State University, Extension Family Resource Management Specialist
Elizabeth Gorham, a native of Iowa, is currently employed as an Associate Professor at South Dakota State University in Extension. She received her bachelor’s degree from Iowa State University, her master’s from Utah State University, and her Ph.D. from Oregon State University. She spent several years in youth and family resource management programming in Utah before transferring closer to home to care for her aging parents. Liz has been active in the eXtension Financial Security for All Community of Practice, serving as a co-author of the Legally Secure Your Financial Future teaching and eXtension curriculums, and the upcoming eXtension Bankruptcy and the soon-to-be- developed Caregiver curriculums.