Category Archive 'Mutual funds'

Proof you should always read a fund’s prospectus before investing

ETFs, Mutual funds, Personal finance, Value investing

This week’s Barrons (dated 7/3/2006) featured an article about ETFs in an article entitled “The Odd Couple” (subscription required). Personally, I’ve found ETFs to be a better solution than mutual funds for my investment objectives, but the article pointed out that “ETF assets have more than tripled over the past 4 years to $469B [and] there are more than 212 offerings…expected to grow at an average annual pace of 33%”. Nonetheless, the mutual fund industry is still a much bigger whopper at $9.5 trillion, so I suppose there’s still plenty of room out there for ETFs to grow.

I’d never heard of PowerShares ETFs, which offer a way to invest in extremely specialized industries (such as varieties of clean energy). But I was pretty shocked to read in the article that “Unlike most ETFs, PowerShares fund components are reshuffled quarterly in order to reflect best-in-show stocks within each sector.”

I had to look into this further. I’m not averse to trying out different investment methods (just look at the title of this site), but I couldn’t fathom the point of owning an ETF whose holdings changed every quarter. Not only that, but the problem with funds with high turnover rates is that they tend to go hand-in-hand with higher taxes, since usually whenever an asset is sold, a taxable event occurs.

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The pitfalls and dangers of target retirement funds

Mutual funds, Personal finance

It seems one type of investment that’s increasingly offered are so-called target retirement funds, also known as age-based funds, or lifecycle funds. Smart Money and other leading personal finance magazines have written many articles recently touting the benefits and growing popularity of these funds. But I disagree with them, and here’s why:

  • They add an additional layer of complication: There are more mutual funds today than there are actual stocks to invest in (this can be corroborated by a 2003 speech given by Vanguard’s Founder). That means that on average, more mutual funds are investing in the same stocks. If target retirement funds are then investing in mutual funds, aren’t you essentially buying an indirect form of an indirect form of a stock? Why add an extra layer of indirectness and potentially an extra layer of costs?

  • There’s less transparency: Some of these target retirement funds “trade” using a symbol (for example, all take the form of “FFFFx”), but some of them, like the ones offered by my previous employer, don’t have a trading symbol at all. I’m not one to constantly watch my investments, but suppose once a year I’d like to make sure my investments are or some other benchmark such as a plain-jane mutual fund. I certainly can’t do that as easily as I could with mutual funds or stocks.

  • You might be less diversified than you think: These funds tout their ease of use by implying that you simply pick a date for retirement and they’ll do the rest: just buy and forget. Suppose you invest in one of Fidelity’s Freedom Funds. These actually invest in Fidelity’s own mutual funds, and if you click on their “holdings” tab they’ll list which ones. But it’s hard, if not impossible, to tell your asset allocation mix and what you really own without then digging into what each fund owns, and trying to determine what percentage of those holdings are in your portfolio. Some studies have shown that .

I realize that most people want to take it easy and not worry about money matters and investments. I come from the philosophy that you really have to be accountable and assertive about the investment choices you make, because after all, you worked hard to earn it, and you will always be the person with your own best interests in mind. Investing, like anything else worth doing in life, takes time and energy, and autopilot or “buy and forget” ’til you retire just sounds like dangerous advice to me.

I believe there are good mutual funds out there, but these target retirement funds just simply aren’t for me because in the end, they take away too much control and just plain aren’t transparent enough. What do you think? Thanks for reading.

Compound Annual Growth Rate (CAGR)

Mutual funds, Personal finance

In finance and investing, whether you’re looking at stocks or savings accounts, it’s often useful to calculate your returns to measure how you’re doing. One way is to calculate your . The best way I’ve seen this defined is in the dictionary (hence the link), which says:

CAGR isn’t the actual return in reality. It’s an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.

Here’s the general formula for calculating CAGR:

CAGR = (ending amount / beginning amount)(1 / # of years) – 1

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