Frequently Asked Questions Frequently Asked Questions On this page you will find answers to many of the questions that we have heard. You may either scroll through them all or jump to one of the areas. The areas are divided into: FREQUENTLY ASKED QUESTIONS
I don't know very much about investing. Where's a good beginning place to learn more?
Buy a book by Kathy Kristof, a business columnist at the LA Times, by clicking here Investing 101 or by clicking on the picture of the book.
Where can I find a good Investing 101 online web page?
A good "University" online is the one done by the Wall Street Journal. Find them at WSJ's Investing 101.Is there a good non-profit organization that offers accurate, reliable information about investing?
Yes, by far the best is AIE, Alliance for Investor Education, which is made up of dozens of investment organizations. They even have fun pages for kids to learn more about investing. Find them at Alliance for Investor Education.
What is a 403(b) plan?
The best recent article explaining 403(b) investment plans was in the February, 2000, issue of Mutual Funds Magazine. You can read it now, Making More of Your 403(b).What is the difference between a 403(b) and a 401(k) plan?
They are much the same. The priciple difference it that 403(b) plans are exclusively for employees of non-profit organizations. 401(k) plans are for employees of public companies and contributions are often matched by the employers.
When is the best time to invest?
What is a mutual fund?
The best time to invest is as soon as possible. Consider the story of Louie the Loser.
A mutual fund is a pool of securities operated and managed by an investment company. Shareholders own a percentage of the securities held by the fund. For example, if the mutual fund invests in stocks, the mutual fund shareholders own a portion of all them.The most common form of a mutual fund is an open-end fund, which means the fund can redeem or issue shares at any time. Shareholders are rewarded for their investment through an increase in share prices and distributions (dividends and capital gains). The managing company earns money by charging a percentage based on the total number of assets in the fund. In some cases, it will also earn revenue through sales fees.
What is no-load mutual fund?
A no-load fund is one that does not have a sales charge to the investor to buy or to sell. Most mutual funds charge between 2% to 6% to buy them and this translates into an immediately loss to the investor. It means that on a $10,000 investment with a 5% charge, for example, the investment would be worth only $9,500 immediately. There are, however, many very good funds that do not charge any fee to buy or sell and you can find a list by clicking on No-Load Funds.
What are the drawbacks of mutual funds?
What Indexes do Index Funds replicate?
(1) Finding the Right Fund
Mutual fund managers may know more about where to invest, but the mutual fund investor has to identify who has the most expertise. With over 9,000 open-end funds, finding the right fund(s) can be a daunting task. Financial advisors can help, but their services usually aren’t free.(2) Tax Considerations
If you invest in mutual funds without using a tax-sheltered account, your tax liability may increase. Only a few fund managers consistently use a buy-and-hold strategy. To improve returns, many fund managers buy and sell securities without considering the tax implications and the effect on the investor's overall returns.(3) No Guarantees
There are funds with big sales fees, large expense ratios, and very poor performance. Mutual funds are investments and one should understand that investments carry certain risks.
Why should I invest in mutual funds?
Many investors simply don’t have enough invested to insulate them from market risks. It could take as much as $100,000 to adequately diversify an individual portfolio, whereas a minimum mutual fund purchase may only be $1,000 for the same risk protection. In addition, you can buy shares of a fund directly from the fund company without having to pay a stockbroker or financial planner. When considering the cost of transactions and commissions associated with a portfolio of individual assets, the expenses related to owning mutual funds will normally be cheaper.
What mix of mutual funds makes a good portfolio?
A portfolio’s asset allocation or ‘mix of funds’ should represent one’s tolerance for risk and time horizon. An investor should establish what percentage to invest in stocks, bonds, cash, etc. before choosing a portfolio of worthy funds. In fact, searching for funds without considering asset allocation may lead to a portfolio of acceptable funds that are all invested in the same thing. A good portfolio diversifies into different assets to hedge against unforeseen market declines.
What is an Index Fund?
An index fund is a fund that seeks to match the investment returns of a specified stock or bond benchmark, or index. The fund does this by buying and holding all (or at least a representative sample) of the securities in the index. There are no attempts to make "bets" on individual stocks in order to outpace the market.
What are the advantages of an Index Fund?
Index funds have two principal advantages:1. Low Cost because they don't have to pay "experts" to pick the investments, they have only minimal operating expenses, and they can keep portfolio transactions at minimum levels. The average general equity fund has an annual expense fee of 1.44% but fees for a low cost index fund is only about 0.3%, about one-fifth the cost.
2. Broad Diversification because the fund owns all the securities in the index not just a few. An index fund doesn't eliminate all risk of investing but it certainly does minimize it. Every year, there are many funds out of the thousands available that outperform index funds but nobody can predict with certainty which ones they will be.
Taking the long-term perspective, the index funds - through their broad diversification and the year-by-year build-up of the cost advantage - surpassed 71% of actively managed funds over the past ten-year period. The average managed stock fund increased by 317% while the Standard and Poor's 500 stock index gained 410%! Even during down periods in the stock market, index funds outperform managed funds.
What are the disadvantages of an Index Fund?
Investors are not going to make a "killing" in the stock market. Instead, indexing is for long-term investors who seek a very competitive long-term investment return through broadly diversified portfolios. In other words, indexing is not a "get rich quick" scheme, it's "get rich slowly" instead.
The most common indexes used are:
- Standard and Poor's 500 Corporate Stock Price Index - most large, "blue chip" companies, which is about two-thirds of the US stock market value
- Wilshire 5000 Equity Index - includes all regularly traded US common stocks
- Wilshire 4500 - similar to Wilshire 5000 but does not include S&P 500
- Morgan Stanley Capital International Europe, Australasia, Far East Index - major international markets
- Morgan Stanley Capital International Select Emerging Markets Free Index - tracks stocks in 16 smaller, emerging countries
What types of Index Funds are there?
There are hundreds of index funds available. Some of the more popular ones offered by Vanguard are:
- Total Stock Market Portfolio
- 500 Portfolio - matches S&P 500
- Growth Portfolio - 152 of the above-average stocks in the S&P 500
- European Portfolio
- Pacific Portfolio
- Emerging Markets Portfolio
- Total International Portfolio
- Total Bond Market Portfolio
- Short-Term, Intermediate-Term, and Long-Term Bond Portfolios
- Balanced Portfolios which include various combinations of stock and bond index funds
Where is a good article about the advantages of an index fund?
A very good article is by the Wall Street Journal's Jonathan Clement called Fund Indexers, Take a Bow.
What are the best Mutual Fund Links?
Vanguard
What is a good book about Indexing?
The best book on this subject is Common Sense on Mutual Funds by John Bogle. You can order it now by clicking on the title.
Is there a good book exclusively for teachers about investing in 403(b) plans?
The best book is The Complete Teacher's Guide to Retirement Wealth by Vincent Tate. Unfortunately it is now out of print so you can no longer order his book by clicking on the title. Maybe you can find one in a local libray.
What is the best book about taking my money out?
The best book on this subject is Taking Your Money Out by Slesnick and Suttle. You can order it by clicking on the title. Please note that in early 2001, the IRS simplified some of the procedures so some sections of this book have not been updated yet. Watch here for when the new edition is out.
What are good web sites to learn more about Mutual Funds?
The best all around source is Smart Money.To find out "everything" about index funds go to Index Funds
The best financial calculators are at Fidelity Funds
The best place to do research on investments is Microsoft Money Central
A good, complete source of daily financial activities is Quicken
The best places to keep track of individual portfolios are Morningstar and Motley Fool
The Wall Street Journal has a valuable site at Smart Money
The most comprehensive list of links to mutual fund information has to be CBS Marketwatch.
Money Magazine is also online at Money Magazine
Is there a good chat room for teachers talking about investing in 403(b) plans?
The best place is at Morningstar. After you're there, go to Discuss and look for 403(b) Forum.What is the best web site to learn the most recent information about 403(b) investments?
The best place is at 403bwise.com. This site is hosted by Dan Otter and John Moore.What is a good web site for finding out how much I should save for my retirement?
The best one currently available is provided free by the non-profit American Savings Education Council.Who is a good financial planner who will help me get started?
A man with lots of experience helping teachers (and others) is Aaron Skloff. You can contact him at 908-464-3060 or at his web site at Skloff.com.What evidence is there that teachers need help with their investments?
Here's the dilemma teachers face, try this test -How much do you think an investment of $50 a week returning 9% a year would grow after 40 years? Only a third of the people questioned said it would be more than $300,000, and 37% said they didn't know. The right answer is $1,021,970!! That's a lot money earned with just a little bit invested.
Even more worrisome is another poll that showed that more than one-fourth of Americans think their best way to build wealth is by playing the lottery. Few people seem to realize that the chance of winning a big lottery jackpot is between 10 million and 20 million to 1. Fewer than half said saving and investing some of their money was the most reliable route to wealth. These pages help to explain that systematic savings is the most reliable method utilizing these three principles:
- Small amounts grow to tremendous amounts over time.
- The sooner the program is started the better.
- Small differences in rates of return will make a tremendous difference over time.
Why do teachers need help in their financial planning?
- School's retirement plan will not provide enough money for a comfortable retirement. (Look at Teachers' Shortfall.
- Too busy to learn about investments
- Often sold the wrong products by commissioned salespeople
What advantages do teachers have that can help them to become successful investors?
You may contact me at: teachersandmoney@inbox.com
