What is a Mutual Fund?

Formally, a mutual fund is generally a type of professionally managed collective investment fund or vehicle, pooling the funds of many investors to purchase securities.  

There is no legal definition of the term "mutual fund."  It is most commonly used to describe collective investment vehicles that are regulated (by the SEC), and sold to the general public.

In the U.S. there are 3 types: open-end, unit investment trusts, and closed-end funds.  Open-end is most common.  This means that the fund has to be willing to buy back shares from investors every business day.  Exchange-traded funds (or "ETFs" for short) are open-ended funds (or unit investment trusts) that trade on a stock exchange just like any other stock, e.g. Apple (AAPL).  

Recently, ETFs have been gaining in popularity, mainly because of lower management fees.  These fees are generally referred to as the Management Expense Ratio (or "MER") – i.e. the fees an investor would pay a fund manager to expertly manage the fund, regardless of the fund’s performance.

Investors pay the fund’s expenses, which reduces the fund's returns and/or performance.  There is controversy about the level of these expenses because several mutual funds consistently under-perform the S&P 500, Dow or other indices, while collecting relatively high fees from the investors, regardless of fund's performance.

Mutual funds are generally classified by their principal investments. The four main categories of funds are money market funds, bond or fixed income funds, stock or equity funds, and hybrid funds.

I opened this post, leading off with the word “formally” for a specific reason: Informally, mutual funds and ETFs (albeit perhaps to a lesser degree), are the investment vehicles of choice utilized almost exclusively by the working, middle-class and/or less sophisticated investors.

Large diversification – which is common with mutual funds – does not protect investors from sharp declines in the market.  A mutual fund that includes e.g. 20 companies is still in the market!  Large downturns in the stock market, such as the ones experienced in 1999 or 2009, affect the whole market, including mutual funds... if every single stock in the fund goes down, the mutual fund goes down too.

Also keep in mind that a basic market rule is that downturns happen more sharply than upswings.  This means you get slow upside growth and rapid downside losses.

Many working people contribute to a 401k or similar type retirement savings plan.  These savings plans generally only allow employees to select one (or a basket) of mutual funds and/or bonds, as may be made available by the carrier (vendor providing the 401k plan administration services).  Typically, investment return falls short of general market returns – as mentioned above – in addition to the investment being subject to (often high) fees.

Simple, common sense rules for smaller investors may be to:

1. Invest in mutual funds in a 401k plan – to ensure that you save for your own retirement, and perhaps benefit from employer contributions, or better…
2. Invest in ETFs instead of mutual funds – if available – because ETF fees are generally much lower than mutual fund MERs, or even better still…
3. Create your own basket of stocks (e.g. copy a mutual fund prospectus, or Buffett’s equity holdings) and buy small quantities of these stocks on a regular basis (to benefit from cost averaging, as the market goes up and down).  The reason why this may be deemed a better choice is because one can buy stock via an online brokerage account for minimal cost, with no further, future, downstream management fees.

Whatever choice you make, be sure to capitalize on your employer contribution – if available – because it’s free money.  More importantly, make sure you save for your retirement because your government cannot be trusted to provide for you in the future, when you are ready to retire and/or perhaps no longer able to work.

Identity Thief!

 (c) Identity Thief (2013) movie

Source: Federal Trade Commission - Consumer Information

Once identity thieves have your personal information, they can drain your bank account, run up charges on your credit cards, open new utility accounts, or get medical treatment on your health insurance.

If you suspect that someone is misusing your personal information, acting quickly is the best way to limit the damage.  Setting things straight involves some work.

How Do Thieves Get Your Information?

 “I thought I kept my personal information to myself.”  You may have, but identity thieves are resourceful: they rummage through your garbage, the trash of businesses, or public dumps.  They may work — or pretend to work — for legitimate companies, medical offices, clinics, pharmacies, or government agencies, or convince you to reveal personal information.  Some thieves pretend to represent an institution you trust, and try to trick you into revealing personal information by email or phone.

What Do Thieves Do With Your Information?

Once identity thieves have your personal information, they can drain your bank account, run up charges on your credit cards, open new utility accounts, or get medical treatment on your health insurance.  An identity thief can file a tax refund in your name and get your refund.  In some extreme cases, a thief might even give your name to the police during an arrest.

Clues That Someone Has Stolen Your Information

• You see withdrawals from your bank account that you can’t explain.
• You don’t get your bills or other mail.
• Merchants refuse your checks.
• Debt collectors call you about debts that aren’t yours.
• You find unfamiliar accounts or charges on your credit report.
• Medical providers bill you for services you didn’t use.
• Your health plan rejects your legitimate medical claim because the records show you’ve reached your benefits limit.
• A health plan won’t cover you because your medical records show a condition you don’t have.
• The IRS notifies you that more than one tax return was filed in your name, or that you have income from an employer you don’t work for.
• You get notice that your information was compromised by a data breach at a company where you do business or have an account.

What If Your Information is Lost or Stolen, But Your Accounts Don’t Show Any Problems?

1. If your wallet, Social Security card, or other personal, financial or account information are lost or stolen, contact the credit reporting companies and place a fraud alert on your credit file.  Check your bank and other account statements for unusual activity.  
2. Order a free copy of your credit report periodically to monitor your accounts.  You have a right to one free copy of your credit report from each of the national credit reporting companies every year.  If you stagger your orders, you can get a credit report every four months.
3. Your state law controls the rights you have if your information is lost in a data breach.  When the organization that lost your information lets you know about the breach, they should explain your options.

Lose Weight Now!

In this blog post, losing weight now does not imply a Chris Christie-type desired weight loss, but rather the instruction to lose the debt girth that is restricting you from achieving financial security, and freedom from financial stress!

Everyone knows it’s tough out there: Investments. Savings. Self-directed. Managed. 401k. IRA. Roth. Tax. Early-withdrawal penalties… oh dear!  Getting educated about various savings and retirement plan options is already intimidating; trying to figure out how much you should have saved by now… perhaps even scarier!

According to moneycrashers, at this age you should have this saved:

22 years old   $1,720 saved

25                    $8,083

30                    $23,880

35                    $49,002

40                    $88,132

50                    $239,429

60                    $582,974

65                    $817,391

The numbers above assume an average rate of return (6.9%, generally easily achievable), inflation (3%) and lifespan (85 years assumed, i.e. retirement age +20 years).

Have you fallen behind?  You’re not alone.  Here are some statistics that may surprise:

- 39%: households nearing retirement do not have a formal retirement plan

- 35%: (only) of Americans confident they can rely on social security

- 47%: for a couple, both 62 years old, there is a 47% chance that one of them will live to be 90 (Are you prepared to live 25 years on your retirement savings?)

- 10%: Early withdrawal from retirement plans, 10% penalty plus taxes

There are two primary reasons why you may be experiencing difficulty in achieving your desired BMI (in terms of age vs. savings/investments, rather than weight vs. age/height):

1. You may be living beyond your means, and

2. You have difficulty servicing your accumulated debt 

Lose the debt, and you’re on your way to slimming down quickly, and fattening up your savings. 

Start with the first line above, i.e. start by living within your means.  If you cannot afford to pay cash for something – especially something small, rather than a major purchase, like a house – just forgo it.   

Question yourself: “Do I really need these new shoes”, “restaurant meal”, etc.  Find a friend who will help rein you in if you’re too weak to manage or limit your spending habits!  And NOT the friend who will say: “Common, you only live once", "Treat yourself", "What are you working for", "You deserve it", etc. 

Then… attack your debt girth with a vengeance!  You may be surprised to see the binary result: less spending + less debt (or lower debt repayments) together = wealth creation.

Now, while you’re attempting to manage your debt girth, also make a pledge to yourself to diligently manage your girth in general.  Don’t eat pre-prepared meals!  Food labeled healthy, organic, low trans-fat, low in carbs, low cholesterol, etc. usually ARE NOT AS ADVERTISED!

The reason why manufacturers advertise food that way is because it is anything but healthy, organic, etc. and if they did not pretend that is was somehow good for you, you wouldn't buy it.  If it were healthy, the manufacturer would not have been able to pack it into a box, packet, can, etc. and store it on a shelf for months!  Simple… right?

So, rule #1 is that any food presented in pretty packaging should be avoided whenever possible.  The second rule makes this methodology as simple to follow as the two financial rules above – move, get active!

All you have to do is eat (mostly) healthy meals, small portions 4-6 per day, at regular intervals to avoid hunger (because then you'll eat more than you have to), and go for a walk (or similar) every day.  Not rocket science, just common sense required!

Life is really that simple, if you make it so!

New Positions for Married Couples

She Proposed... Now What?

Marriage combines the two most lethal human desires - emotion and money!  Below are some delightfully new positions for a newly married-couple-to-be to consider, most of much greater importance than a 1 hour (okay, I’ll be honest… 45 min) sweaty, naked romp on satin sheets!

Position #1:  Much has been made of America's 50% divorce rate, but experts say there is little statistical truth to it.  In fact, it seems this ‘statistic’ is mostly considered folklore.  According to the U.S. Census Bureau, a more accurate rate is 36%, which applies to both men and women between ages 50 and 69 who have been divorced at least once in their lives.  Good news?

So you want to get married… the odds of achieving marital bliss seem at least somewhat in your favor.

Position #2:  According to the website costofwedding – on average – U.S. couples spend $25,631 per wedding.  Spending $25,000 to throw a party for a few hours, allowing for a few members of your family and friends to celebrate your wedding, therefore seems to be the norm.  This is just plain stupid, especially since most young people cannot afford $25 K, and because many of their baby-boomer parents are already broke and not making good provision for their own retirement!

Based on some superficial Internet research, an average U.S. couple has a 57% chance of seeing their 15th wedding anniversary.  If they make it that far, most will reach "til death do us part."  $25,000 invested in boring Dow stocks at an average 10% annually (including reinvested dividends) would be worth almost $200,000!  Doesn’t that make more sense than a 4-hour wedding reception?

Fire the wedding planner and hire a financial planner instead!

Position #3:  Getting married, all on its own, is full of financial surprises.  For people considering marriage these days, including gay couples, there's a new one challenge: falling into the net of the Fed’s dreaded Alternative Minimum Tax (or AMT).

What's more, the AMT hits married couples particularly hard. For example, for the 2011 tax year 6.1% of married couples were required to pay the AMT (according to an estimate by the Tax Policy Center, a joint initiative of the Urban Institute and Brookings Institution).  In addition, married couples are nearly six times as likely as single taxpayers to trigger the AMT.

The AMT hurts newlyweds for a simple reason:  The typical deduction limits for couples, are less than double those for single filers.  That bite often comes on top of the marriage penalty under the ordinary tax.

Most financial advisers will confirm that clients don’t even ask for an AMT calculation before planning a wedding – maybe it’s time to start!

I’ll conclude with this:

A recent “National Marriage Project” study conducted by the University of Virginia highlighted the following observations:

- Rising consumer debt after a couple's wedding contributes to the instability of unions among newlyweds.

- Couples with assets of $100,000 or more have lower divorce rates than those with less money.

- Couples who reported disagreeing about finances more than once a week were 30 percent more likely to divorce than couples who reported disagreeing about finances only a few times a month.

Best of luck and success in finding your own most comfortable and satisfying position, and married bliss happily ever after!

Disclosure: the author is long on long-term marriage, having enjoyed more than 27 years of consistently good, positive investment return.  Here's wishing the same for you, complemented by financial freedom and security included in your own happily-ever-after investment!