Investment
A commitment of current funds in anticipation of receiving a larger flow of funds
What are the two components of total return in an investment?
Current income - simple interest on your savings account
Capital gain (losses) - the changes in price
What is liquidity?
The ability to convert an asset into cash.
Arithmetic Mean
The simple average of numbers
Geometric mean
Calculates the average annual compounded return of the set of numbers; it calculates the changes in wealth
Standard Deviation
The measure of how spread out numbers are; square root the variance.
Variance
The average of the squared differences from the mean.
- Calculate the average
- Subtract the differences of x and avg
- Square the differences and divide by number of avg
Mutual fund
An investment company that raises money by selling its own shares and then invests those proceeds in a variety of securities; it is often described as a pooling arrangement.
Open end
Funds that continually sells new shares to the public
Closed end
Funds that have a fixed number of shares and trade on major exchanges like stock and often appears in the wall street journal separate from the the regular listed funds
Load
A fund that has a “load” has a sales charge applied against the investment which may be between 1%-8.5%.
Front end loads
Loads are levied against incoming deposits or investments
For example:
Front end load would charge $30 on a $1000 investment when the investment is being made. ($970 would be invested)
Back end load
Load would levy the sales charge against funds that are being withdrawn from the fund.
No load funds
A fund that has a no load has no sales charge. Money invested is deposited directly into the fund
What are some fund services that you can expect from your mutual fund provider?
- Automatic Reinvestment of earnings
- income checks sent home
- information services, toll free numbers, 24 hour service
- websites filled with information, quotes on securities, prospectus
Dollar cost averaging
The systematic purchase of mutual fund shares regardless of the share price. Dollar cost averaging is the concept frequently quoted when investment professionals discuss the benefits of long-term mutual fund investing. Investors are encouraged to make periodic investments into a mutual fund and not try to “time” the market. History has so far proven that investors were well rewarded for not “trading” their investments. To implement dollar-cost-averaging, an investor would simply create an annuity for themselves by sending the investment company an amount out of each paycheck. That amount would be invested when the funds arrived at the investment company. Investments in a 401(k) plan are dollar-cost-averaging. Each pay-period, a pre-determined amount is invested into a fund of the employee’s choosing.
Sector Funds
Invest in a particular sector or industry. An example of a Sector fund is the Fidelity Computer Fund, the Brokerage fund or the Japan fund. Each of these specialize in companies within those industries or, in the case of the Japan fund, a particular geographical area. The fund continues to offer a diversified portfolio to the investor, but it is more narrowly focused than a general stock fund that may have investments across several industries.
Money market funds
This is just like a money market account at a bank. It is where idle cash can be held between investments. The money earns interest similar to a bank savings account
Index Funds
The Standard & Poors (S&P) 500 is the most widely quoted Index in the world and represents a diversified list of 500 companies. The index is not managed, S&P chooses the companies that are used to fill the index, companies that best represent the market and different industries. Mutual fund managers that manage stock portfolios are most times graded against the “general market,” the S&P 500.
After studies on the S&P 500 revealed that it’s performance was beating the vast number of professional money managers, mutual fund companies began offering an Index Fund that mimicked the famous index. S&P 500 Index funds are some of the largest funds in the world and they consistently outperform about 70% of all stock funds. The investment company simply buys stocks of the 500 companies that constitute the index. When S&P replaces one company with another, the fund follows the move, selling one company from the fund and buying the stock of the company that is being added to the index.
Prospectus
Part of the Investment Company Act of 1940 is the requirement that investors be supplied with a Prospectus of the Mutual Fund at time of investment. The Prospectus contains information about the fund that the Securities & Exchange Commission deems essential for the investing public. The Prospectus is the place where the fund company discloses all of the particulars of the fund. For example, if the fund is a load or no-load, if it is an open-end fund or closed-end, what kind of stock or bonds that it may invest in and in what quantities, etc. A fund may have a restriction that it may only invest 5% of its money in a particular company, that it may only have a certain percentage of cash on hand, that it can only hold a certain percentage of bonds in the portfolio or if it can hold bonds at all. The Prospectus is the single document that the investment company will insist that you read before sending them money. Investment companies and brokers have gotten into big trouble in years’ past for not sharing this document with investors or potential investors.
Fund Nav
Look in the Wall Street Journal’s Mutual Fund section. There you will see the Investment Company name in bold, followed by the individual funds that the investment company offers to investors. A typical, daily Wall Street Journal Mutual Fund section is good for watching investment that you already own. There is not enough information on a daily basis to select a fund from these listings for initial investment purpose. The investment objective, fund performance or Load/No-Load indication are not shown. The month-end and quarter-end mutual fund tables in the Journal contain all of that information including expanded tables on the fund’s performance over extended periods of time.
What is shown daily, is the Net Asset Value of the fund, or NAV. There is a simple and not simple explanation of what the NAV is: Using the simple explanation it is the price-per-share of the fund. Looking at the Journal, pick out an NAV. Let’s say for example the number is 30. This means that fund’s closing price-per-share for the day is $30. If you sent a check for $3000 to that fund to invest, and your check was invested that day, you would have bought 100 shares of that fund. Simple. After your purchase you may be naturally curious how your fund is doing over time and by checking the NAV in future information sources.
The more difficult but necessary explanation of the NAV: It is the assets of the fund, minus the liabilities, (which equals net worth), divided by the number of shares outstanding. The fund’s price is set by this calculation each and every day and it represents the per-share value of the fund. In an example, say the fund has $100,000,000 in assets and $10,000,000 in liabilities with 3,000,000 shares outstanding. The NAV would be: ($100,000,000 - $10,000,000) / 3,000,000 = $30 per share.
Mutual fund objectives
Selecting the right fund type and objective is the first step in mutual fund investing. The objective of the fund dictates its risk propensity as well as defines the investments that the fund manager must invest in.
All-stock fund, cannot purchase bonds even if the bond market is outperforming the stock market. The prospectus is the document that outlines the type of fund, the objective of the fund and the permissible investments of that fund.
We as investors must be mindful of the ever changing investment climate to switch from one fund to another to enhance our return as industries or sectors fall in and out of favor
Aggressive growth fund
Seeks maximum capital gains, not current income. May invest in new companies, or troubled firms. Use derivative securities to boost returns
Balanced
Aim to conserve principal, generate current income, and provide long-term growth. Have portfolio mix of bonds, preferred stocks, and common stocks.
Corporate bond
Seek high level of income. Buy corporate bonds, some US Treasury bonds or bonds issued by federal agencies
Flexible portfolio
May be 100% invested in stocks, bonds, or money market instruments. Have the greatest portfolio flexibility of all funds.
Ginnie Mae (GNMA)
Invest in mortgage backed securities. Must keep majority of portfolio in these securities
Global Bond
Invest in debt of companies throughout the world
Global Equity
Invest in stocks of companies throughout the world
Growth
Invest in common stocks of well-established companies. Capital gains is primary objective.
Growth & income
Invest in common stock of dividend-paying companies. Combine long-term capital gains and steady stream of income.
High-yield bond
Keep two-thirds of portfolio in lower-rated corporate bonds to achieve higher income
Income bond
Invest in corporate and government bonds for income
Income equity
Invest in companies with good dividend paying records
Income
Mixed seek high current by investing in equities and debt instruments
Index
Buy stock to match an index such as the S&P 500
International
Invests in equity (stock) securities located outside the U.S
Long-term municipal bonds
Invest in bonds issued b;y states and municipalities
Money market
Invest in short-term securities sold in the money market
Option/income
Seek high current return by investing in dividend-paying stocks on which call options are traded
Precious metals
(Gold) keep two-thirds of portfolio in securities associated with gold, silver, platinum, and other precious metals
Sector
Concentrate holdings in a single industry or country
Short-term municipal bonds
Invest in municipals with short maturities
Single-state municipal bonds
Portfolios contain issues of only one state for income tax reasons
Socially conscious
Avoid investments in corporations that are known to pollute, involved in tobacco, liquor, etc.
US Government income
Invest in a variety of government securities, including US Treasury and agency issues.