 Personal Finance PowerPoint Presentation Types of Mutual Funds Overview Prepare to get financially fit by practicing personal finance Most of this information comes from the Vanguard website, which you can find online at investor.vanguard.com In prior presentations, we've been looking at investment goals, strategies, tools, keeping in mind the two major categories of investments That being the fixed income, typically the bonds, and the equities, typically the common stocks We also want to keep in mind other tools we might be using, such as mutual funds or ETFs Possibly to help us pool investments together, helping us to diversify possibly with less of an overall investment from us As opposed to investing in individual stocks and individual bonds And that's what we're focusing in on here, looking at different types of mutual funds So we talked about mutual funds basically in general and prior presentations We know the strategy that we're going to be using on the mutual funds side of things will typically be That we can diversify more easily with the use of the mutual funds Because our money is going to be pooled with other investors So the manager of the fund can take those funds and invest in different assets In accordance with what the fund terms are And the fund terms can be more or less descriptive So now we can think of different types of ways that we might categorize the mutual funds In other words, if we're thinking about an investment strategy, the question would be As an individual investor, do we want to be focusing in on individual stocks, individual bonds Which could be a more cumbersome strategy and could be more costly in terms of the purchasing of the bonds And more difficult to diversify or oftentimes individual investors Especially if we're taking a long term view of things, saving for something like retirement Might use tools such as the mutual funds which help us to pool the investments together Then we want to think about, okay, if that's the strategy, what type of mutual funds do we want to be putting money into Also, keep in mind that if you're investing using tax strategy or tax advantageous strategies Such as putting money into a 401k plan or an IRA, something like that Then note that those tools are usually kind of like, I would think of them as basically an umbrella Over the investment tools that you are investing in In other words, you could invest in a mutual fund either under the umbrella of a 401k plan Or you have access to that or under the umbrella of an IRA or outside of under the umbrella Meaning the investment tool that you're using really isn't different If it's under the 401k plan, it's not like the 401k plan is an entirely different vehicle of investment It just has the added component to it of being under the umbrella of a retirement plan account Which means there's going to be certain tax implications related to it Typically saving taxes when you put money in and deferring the taxes when you have to pay the taxes In other words, and so that's going to have tax implications But it also comes with restrictions in terms of when you can take the money out So just a couple things to keep in mind So now we want to think, well, what kind of mutual funds are we going to be putting our money into Should we try to find like one mutual fund that can take care of all of our needs Possibly like a targeted mutual fund that's going to help us to diversify Should we put our money into managed funds, should we put our money into our index funds So in order to answer or think about those questions, we've got to think about What are the different types of mutual funds available And again, looking at something like a Vanguard and reading up on the funds that they have Could be a place to go to dig further into this information So we've got money market funds, we've got bond funds We've got the balance funds, we've got stock funds, international funds And sector and specialty funds So we'll dive into a little bit more detail on each of these funds And possibly think about why you might be using them in future presentations So we've got the money market fund Use money market funds to limit your money's exposure to market risk While you save for emergencies and upcoming big purchase Or another short term need So you would expect the money market funds not going to have as much of a potential return As other kind of investments such as the stocks Possibly or possibly even the bonds But investing in stocks also has the risk of a downturn as well So you might be using the money market funds to kind of park some cash And possibly get some return on it there We'll dive into more of these in a little bit more detail in future presentations We'll just give kind of an overview here We've got bond funds So you could choose bond funds if you're looking for income And want to moderate the risk involved with stock portion of your portfolio So clearly we usually want to be balancing between the typical strategy If you're saving save for retirement Is to balance between equities investing in stocks Investing in the fixed income Which would be the bond So a typical investor would want to have some of their investments in bonds And again instead of buying individual bonds You might buy say mutual funds for the bonds Or you might try to get some kind of fund that already has a mixture And also realize that the time horizon of when you're getting closer to retirement Then the mixture of how much you want in stocks and bonds might differ You want to have less risky stuff in general As you get closer to the retirement If you're in retirement then you might be living off of your investments In that case you might want more money on the bonds side of things Because those are going to give you actual money back in the form of interest As opposed to some stocks which if you're looking at growth stocks There are stocks that are going to kind of grow And they might not be giving you the dividend that you would be living on But possibly increasing your hope and they're going to increase the stock price So then we got these funds generally offer higher yields Then money market funds and less volatility than stock funds So they're kind of in between the money market funds They're kind of places where you're parking your cash And you're taking on very little risk but have a little return capacity The bond funds you would think would be a step up in both risk and possible return And then the equity funds are typically more risky But you have more possibility for growth there So balance funds, so look to balance funds for a mix of income and growth potential in a single fund So oftentimes if you're putting money into say like an IRA or something like that You might be using saying hey you can take the strategy of saying I'm going to buy funds or index funds in a bunch of different categories to fully diversify You might say I'm going to buy bond funds and I'm going to try to diversify in the bond funds I'm going to then try to buy equity funds and diversify in the equity funds And then I'm going to basically try to diversify in that way Or you might try to say I'm going to buy one fund in essence that is balanced in some way between bonds and the equity And that's basically the easiest most hands off type of strategy you can use Although the mixture is you're going to be much more limited to Because it's going to be determined by the mixing of the fund itself So these funds have a varying degree of risk based on the percentage of stocks and bonds in the portfolio So clearly if you have some kind of mixed fund then that percentage that you got to say Well what's going to be the optimal mix and you might have a targeted fund where that mix might actually change For example if you're trying to save for retirement because the mix ideally between bonds and stocks and risk Versus non risky stuff might differ with relation to your time horizon as to when you're going to be taking the money out For example at the point of retirement So some may maintain a steady asset allocation Others gradually become more conservative over time And so those would be those kind of so we'll talk more about these in future presentations Then you got stock funds Consider stock funds if you want to increase your chances of growing your money over longer periods of time So usually when people think of mutual funds the first thing they think of is probably stock funds The mutual funds you're putting money into and then they're taking that money and they're investing it in different stocks But remember you could have bond funds too and you could have mixed between the stock and the bonds So these funds expose you to more risk than typical bond funds So clearly when you're putting money into bonds you're probably not going to have explosive growth or anything like that But you could have some return on the investment and they're going to look more significant if inflation goes up For example because you would think that in the returns on the bonds the interest rates would go up at some point As opposed to when interest rates are like zero and you're looking at the bonds and saying hey it doesn't look like them doing anything here But the equity are more likely to peak but they also have the potential for the downside for losses as well So you can limit some of that risk when you pair stock funds with bond funds as part of a diversified portfolio So clearly as we're looking at these mutual funds we want diversification just as we talked about with individual stocks So now we can look at kind of sections of the market to help with that diversification as we think about these funds They can cover different sections possibly investing in multiple sections or possibly buying one fund that tries to take everything into consideration So then we have the international funds get exposure to investment opportunities in developed and emerging countries So now you might be saying well I would like it sometimes you're looking at the US stocks are usually fairly one of the more solid places that you can be Because if they're trading on the US stock exchange then that's a more stable place to be So you might not have as much growth in the US for example because you would think like if you think about the companies themselves Then they have that growth curve that we've looked at in prior presentations and they're going to peak out like this And you would like if a company is going to grow you'd like to be somewhere here with the growth with the curve is increasing like this That's when you get the biggest type of returns as opposed to up here where you're not going to get as much return You can think about the similar thing with a country if a country had a nice smooth upward growth pace It would look something like this as well and the US is kind of like a big stock on the company side of things They're up here so you would expect growth to be marching along but you don't expect that expansive growth like in the country Whereas a third world country you could say well man a lot of people don't have a lot of GDP right there If they just did a little bit better and their GDP went up a little bit that could have explosive growth there So that's why you could have other growth opportunities in other areas of the world that could actually be bigger But there's also more risk that's involved in it that's why people often invest in the US stocks because there's less risk and there's more security in it So in any case you got that same kind of diversification idea that you could start to possibly diversify in other countries Because that means that if there's a problem in one sector of the world maybe you balance that out elsewhere Although the US area is typically the safe haven oftentimes So international funds can provide additional diversification in a well balanced portfolio So sector and specialty funds focus on a specific industry like precious metals, real estate, health care or energy So now you can look at how you're going to diversify in terms of the types of investments that they are investing in But remember these funds have a very narrow focus exposing you to more risk and should only be used to supplement an already diversified portfolio Meaning if you're now looking at your equity funds for example investing in stocks and you're investing in equity funds in very specific type of funds Meaning they're investing still diversified because they're investing in multiple different tools like different companies But they're doing so in a very specific area like real estate or health care Well then you're diversified in the area of real estate but you're not diversified if that's your only portfolio in other areas as well So you want to think if that could fit well within your portfolio meaning you might want to take a strategy of investing in different mutual funds That are geared towards specific industries and diversify with multiple mutual funds Or you might try to find one mutual fund depending on your strategy that covers all the stocks that you think has a good mix Just in one fund although you're more restricted in that way but it's easier to do Or you might again try to find one fund that's balanced that's trying to take everything into consideration and have one fund One balancing fund which would be the most hands-off method Also realized that we'll probably talk about in future presentation index funds versus managed funds So you might be saying I'm going to be betting on the real estate market in general and buying a fund that is tied to an index For example in that specific area or you might be trying to get a managed fund either in a specific area or more broadly giving the manager of the fund More capacity to possibly beat the market within a particular area or the market in general in a more broad fund And looking at the trade-offs that we've talked about in prior presentations between the idea that if you have a more actively managed fund It's going to cost more because those managers are expensive they're trying to beat the market And so they're going to have expenses related to that so they would have to beat the market sufficient enough to clear the expenses In order for it to be worthwhile to not just invest in say like an index fund which you would expect to have the lower expense ratio You might be thinking I tend to lean towards index funds so I tend to think I'm going to invest in the market So I'm going to try to find a diversified portfolio that I think is reflective of the overall market and bet on the market for the long run for retirement And that will lower the expense ratios and hopefully over the long run the market will go up But if you think the active management funds will outpace that so much so that they'll actually beat the added costs that are involved for active management Then you can do a similar strategy using active management So we'll dive into some of these categories in a little bit more detail in future presentations