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Booktalking "The Mutual Funds Book" by Alan Northcott
Not sure you want to invest, but you want to learn more about personal finance? This is your book.
Want to ensure that you enjoy a safe happy retirement? You may want this book.
Not happy with your financial situation, and longing to feel in control of your money? Pick up this book.
I have been reading many financial books lately, and even after many phone consultations with my investment firm, I still had a spotty understanding of mutual funds. This book is by far the best book on mutual funds that I have read; it cleared up any misconceptions I had about them, and it gave me a comprehensive understanding of mutual funds as an investment vehicle. It gave me enough knowledge that I am confident in my ability to invest in mutual funds by searching the Morningstar database for five-star funds that meet my investment criteria.
The book gives readers a background in the economic history of mutual funds. I had been frustrated in my struggle to learn about finances. I work in a career that deals with a lot of research, but not quantitative research. This book provides background information on mutual funds without making the reader feel stupid. I have also gotten some advice from family members that has helped me a lot, especially from a retired financial professional. They have much more experience investing in mutual funds than I do.
Choosing a Mutual Fund: Some of the information about "assembling a portfolio" and such was a bit advanced for me. Luckily, I chose a discount brokerage firm (TD Ameritrade) that was specifically recommended by Suze Orman in her book The Road to Wealth. A discount brokerage firm helps people invest in mutual funds that other companies (ie, Vanguard, Fidelity, etc.) manage. They have recommended "premium funds" to choose from on their web site, which includes their Morningstar ratings. After a bit of experimentation with the database (I clicked on their "Fund Favorites"), I was able to find another fund for me to invest in.
After all of my reading about investing and mutual funds, I found all of the information overwhelming. I was at a loss of how to choose a mutual fund with the risk level that I desired (my discount brokerage firm said that I was a moderate, not a conservative or aggressive investor. I wanted a stock/bond (or other fixed income investment) ratio of roughly 50%/50%, with investments in different industries. Luckily, my investment firm is associated with a bank, and they have several offices in Manhattan. I came up with all of these investment ideas from reading a variety of books about personal finance and investing, in particular, this book.
Low Interest Rates of Money Market and Savings Accounts: Like many people, at some point I realized that certificates of deposit (CDs) and money market accounts are currently giving abysmal rates (1-1.5%) that are lower than inflation (typically 3% per annum). Gradually, I started reading more about retirement and personal finance in an attempt to spend, invest, and use the money that I do have more wisely. I also started watching the Suze Orman Show on TV. One day, a lady with $1 million in savings bonds came on the show. Orman said that she supposed that the woman was getting $30,000-$40,000 per year. I thought, 'Wow! That's 4%! I'm only getting 1-1.5% interest from my accounts.' I considered buying some savings bonds, which unfortunately, have horrible rates right now. Therefore, I decided to start investing in mutual funds (5-10% return per year).
Opening a Roth IRA: I would not have considered going in person to open a Roth IRA (Individual Retirement Account), but the friendly and very knowledgeable telephone representatives from my investment firm suggested it. I thought, why not? It would be an experience to walk into a financial institution after pretty much doing my banking by phone and mail for the last decade. My investment firm has one recommended fund for conservative investors (short term, ie 5 years or less), one recommended fund for moderate investors (5-10 year length of investment), and one recommended fund for aggressive investors (10+ years of investment). You should choose a mutual fund in accordance with your tolerance for risk. You do not want a heavily stock-invested fund 80%+ of stocks if the tempestuous fluctuations in the stock market will cause you many sleepless nights.
Going to speak to an investment consultant in person was an enlightening experience for me. Opening a Roth IRA in this manner was much more helpful than simply mailing in an application and check for numerous reasons. The #1 reason -- I filled out the application, I thought, well enough, albeit with one glaring omission: my name and a few other things. I will admit it; I felt like an idiot. My investment buddy fixed all of the errors, answered my questions, provided some information voluntarily (eg, $35 fee for telephone trades) that I would not have known otherwise, and he demonstrated some of the searching capabilities of their fund databases (the librarian in me loved this!!!). He gave me his card so that I could contact him if I had questions, and it will be great to meet with him again when I open another account. He told me that two types of people invest with their firm: those people who want to play with individual stocks and do not want his help, and those who know nothing about investing but they know that their savings accounts are not generating any income. I fall somewhere in between.
Types of Investments: There are two fundamental ways to invest your money: lending and ownership. With lending (bonds, CDs, etc.), there is some "credit risk" that your creditors will not be able to pay your principal balance back at the end of the loan period. This type of investment is referred to as "fixed income." Since inflation exceeds the current interest rate of such investments, your money will depreciate in value should you choose to make these investments in the current flagging economy. Stocks represent a share of ownership, which is the other way to invest your money. If you purchase individual shares of stock of a particular company (eg, Apple, General Electric), you are part owners of the company. It is not recommended that investors trade in individual stocks unless they are financial wizards.
Mutual funds typically comprise multiple stocks and bonds (one mutual fund I looked at had 80). The conventional advice with mutual funds is that diversification is the name of the game to protect against the volatility of individual stocks. Also, qualified and talented managers of the funds help ensure success. Choosing mutual funds that are managed by reputable investment firms is advised, as well. Index funds are passively managed by professionals, but computers also monitor the performance of individual stocks. This book in particular is very helpful in its coverage of the disadvantages of mutual funds.
Tax Information Regarding Mutual Funds: The book also helpfully covers tax information that is of use to those who invest in mutual funds. It explains that you will get receive a tax form 1099 regarding taxable income that you received from your mutual funds. This information must be declared on the state and/or federal tax forms that you file every year or pay to have someone else file on your behalf.
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- Financial Empowerment Day at SIBL: Friday, April 26, 2013