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The Feeling Is Mutual


Pool your dough and watch it grow.


By Selena Maranjian

Have you ever stopped to think about how great mutual funds are? Didn’t think so. Few of us have the time, interest, or know-how to dissect the stock and bond markets, looking for the investments that might lead to riches. That doesn’t mean we have to rely on lottery tickets as a retirement strategy though. Instead, there are mutual funds, probably available in your workplace’s retirement plan, and which you can invest in on your own too.

How does it work?

Buying into a mutual fund essentially means you’re pooling your money with lots of other folks and hiring some experienced people to manage it. There are many different niches you can zero in on with mutual funds. Some funds focus on large companies, some on small. Some invest only in foreign companies, some only in municipal bonds, and others only in energy companies. Mutual funds also offer instant diversification. A typical stock mutual fund will own more than a hundred different stocks.

With more than 8,000 mutual funds out there, you can be sure there are more than a few that will serve you well. The key is knowing how to find them.

Things to consider

When shopping for a fund, consider first which asset category the fund falls into, such as large cap value, equity income, international equity, investment grade corporate bonds, government bonds, etc. The category is often included in the fund’s name. When you see the word “equity,” this typically means stocks, whereas “fixed income” means bonds. Generally speaking, stocks tend to be more volatile than bonds, but over long periods of time, they tend to outperform bonds too. 

If you see a “load” mentioned, that’s a sales charge. A front end load (also called an A share), will typically reduce your investment by around 5 percent. So investing $3,000 means $150 will be deducted when you invest. This is a one-time sales fee. You can buy other types of shares (called B’s and C’s) that have different fee structures and are designed for different investment time spans. Loads aside, funds also carry annual management fees, which cover the costs the fund family incurs managing its funds.

There are also no-load funds that do not have an upfront sales charge. However, this does not mean they won’t have fees throughout the investment. Again, read the prospectus, or fund description, to understand exactly what the fees are for each fund you may be considering.

You may also want to look into index funds that follow the broad market (for example, S&P 500 Index or Total Stock Market Index).  If the market heads up, they go up. If the market takes a dip, they do too. They generally have lower expenses because fund management involves investing only in the securities of the index.

Want to aim higher?

To aim higher than the market average, seek managed funds with long, strong track records. Always keep in mind that past performance does not guarantee future results. The stock market has returned about 10 percent per year, on average, over most of the past century. Some outstanding mutual funds have long-term averages topping 12 percent and even 14 percent. If you earn 10 percent annually on a $10,000 investment over 20 years, you’ll end up with about $67,000. Up the return to 12 percent, and you’ll top $96,000. The best place to research mutual funds online is at www.Morningstar.com/Cover/Funds.html.

Whenever investing in mutual funds, consider putting your money in a diversified portfolio. That gives you a balance of equity and fixed income funds that can help smooth out the ups and downs of the marketplace. Determine the exact balance of those investments by gauging your own tolerance for investment risk and the length of time that you want to invest. Younger investors with lots of time ahead may be best served by focusing more on stocks, while investors nearing retirement might want to add more bonds for balance.

It’s Time to Snoop—On Yourself!

Another report card to review, but this one’s about you.

Not many things in life are free—but thanks to recent legislation, peeks at your credit report finally are. All Americans are now entitled to a free copy of their credit report from each of the national credit-monitoring agencies, once per year. Don’t assume that this is a ho-hum development. Your credit rating affects many parts of your life. If you need to borrow money to buy a car or a home, lenders will be checking out your credit history. These days, insurers, landlords, and even some prospective employers have taken to looking at credit ratings.

You should be looking at your credit report too—to check for errors or signs of foul play. If your identity is stolen or someone is using credit under your name, you’ll likely see signs of this activity on your credit report.

Since there are three main reporting agencies (Equifax, Experian, and TransUnion), consider getting your annual freebie from one of them every four months. That way, you’ll be able to review your record fairly frequently throughout each year. (Note that each agency might have different information on you.)

To request your free reports, click over to www.annualcreditreport.com (be sure to spell it correctly, or you may end up at a fraudster’s site) or call 877-322-8228. Once you get your copy, make sure that all the information on it is correct. Be thorough. The report should include information on how to have errors corrected.

Learn more at the US Federal Trade Commission web site.

For Richer, Not Poorer

Put ‘share financial goals’ on the to-do list before the ‘I do’ day.

So, you’ve decided to head down the aisle toward wedded bliss. Congratulations! With some planning and a little discipline, you and your sweetie can enjoy a life together that’s richer in many ways, including financially.

Communication is critical for success. Make sure you and your partner understand each other’s ambitions and dreams along with your goals as a couple.  Come up with a master plan for reaching these goals (such as saving enough for a down payment on a home). It should involve regular saving and investing, but shouldn’t eliminate occasional treats, such as an evening out or a vacation. Discuss your views on subjects such as credit card debt, savings, investments, shopping, splurging, etc. Make a point of checking on your financial progress together regularly—perhaps once per month or quarter.

Learn more in these books: Smart Couples Finish Rich by David Bach and The Family CFO by Mary Claire Allvine and Christine Larson.

The Five Commandments of Budget Travel

Honor thy wallet with a little careful planning.

  1. Thou shalt research thy vacation. You can get the scoop on countries and cities at your library or online. Punch vacation spots and travel companies into a search engine such as Google.com and learn more about them. You can also look up information on airlines, cruise companies, and vacation companies. Find out when your destination’s off-season is—travel is often cheaper then.
  2. Thou shalt comparison-shop for good deals. Sign up at airline Web sites and they’ll e-mail you about special deals. You can compare rates for flights, hotels, and car rentals at sites such as http://www.sidestep.com/, http://www.expedia.com/, http://www.orbitz.com/, http://www.bnm.com/, and http://www.cheaptickets.com/. Just be sure to check a handful of such sites. None of them cover all the possibilities.
  3. Thou shalt consult with an expert. A good travel agent can provide valuable advice and find you great deals.
  4. Thou shalt be flexible. If you can leave or return a day earlier or later, you might save a bundle. If you’re ready to be “bumped” from a full flight, you can snag a free ticket.
  5. Thou shalt use thy credit card. Many credit cards offer special perks to travelers, such as free collision insurance on car rentals and free traveler insurance for bus, boat, train, or plane trips charged on plastic. Some cards even provide inexpensive roadside assistance and can help if you lose your luggage or need a doctor or lawyer referral while on vacation. See what your card offers.

Illustrations: Rob Colvin; George Underwood; Photo: Thomas Barwick; Digital Vision

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21-Feb-06