Mutual Funds For Dummies

Introduction 1 What’s New in This Edition 2 How This Book Is Different 2 Foolish Assumptions 3 Icons Used in This Book 4 Beyond the Book 5 Where to Go from Here 5 Part 1: Getting Started With Funds 7 Chapter 1: Making More Money, Taking Less Risk 9 Introducing Mutual Funds and Exchange-Traded Funds 10 Making Sense of Investments 11 Lending investments: Interest on your money 11 Ownership investments: More potential profit (and risk) 12 Surveying the Major Investment Options 13 Savings and money market accounts 13 Bonds 14 Stocks 14 Overseas/international investments 15 Real estate 16 Gold, silver, currencies, and the like 17 Annuities 17 Life insurance 18 Limited partnerships 18 Reviewing Important Investing Concepts 19 Getting a return: Why you invest .19 Measuring risks: Investment volatility 20 Diversifying: A smart way to reduce risk 22 Chapter 2: Fund Pros and Cons 23 Getting a Grip on Funds 23 Financial intermediaries 25 Open-end versus closed-end funds 25 Opting for Mutual Funds 27 Fund managers’ expertise 27 Funds save you money and time 30 Fund diversification minimizes your risk 31 Funds undergo regulatory scrutiny 32 You choose your risk level 32 Fund risk of bankruptcy is nil 33 Funds save you from sales sharks 34 You have convenient access to your money 34 Addressing the Drawbacks .35 Don’t worry about these 36 Watch out for these 37 Chapter 3: Funding Your Goals and Dreams 39 Acting Before Researching: The Story of Justine and Max 39 Lining Up Your Ducks Before You Invest 41 Pay off your consumer debts 41 Review your insurance coverage 42 Figure out your financial goals 42 Determine how much you’re saving 43 Examine your spending and income 43 Maximize tax-deferred retirement account savings .44 Determine your tax bracket 45 Assess the risk you’re comfortable with 45 Review current investment holdings 46 Consider other “investment” possibilities 46 Reaching Your Goals with Funds 46 The financial pillow — an emergency reserve 47 The golden egg — investing for retirement 48 The white picket fence — saving for a home 52 The ivory tower — saving for college and higher education 52 Part 2: Evaluating Alternatives to Funds 57 Chapter 4: Selecting Your Own Stocks and Bonds 59 Deciding to Choose Your Own Stocks and Bonds 59 Beware the claims of stock-picking gurus 60 Know the drawbacks of investing in individual securities 64 Understand the psychology of selecting stocks 65 Picking Your Own Stocks and Bonds 66 Chapter 5: Exchange-Traded Funds and Other Fund Lookalikes 69 Understanding Exchange-Traded Funds 70 Understanding ETF advantages 70 Eyeing ETF drawbacks 71 Seeing the pros and cons of trading ETFs 73 Identifying the best ETFs 73 Mimicking Closed-End Funds: Unit Investment Trusts 75 Customizing Your Own Funds Online 76 Chapter 6: Hedge Funds and Other Managed Options 79 Hedge Funds: Extremes of Costs and Risks 80 Getting the truth about hedge funds 80 Investigating hedge funds 82 Managed Accounts with Hefty Fees 84 Private Money Managers: One-on-One 86 Robo-Advisors: Automated Investment 87 Part 3: Separating the Best from the Rest 89 Chapter 7: Finding the Best Funds 91 Evaluating Gain-Eating Costs 91 Losing the load: Say no to commissions 92 Considering a fund’s operating expenses 98 Weighing Performance and Risk 100 Star today, also-ran tomorrow 100 Apples to apples: Comparing performance numbers 104 Recognizing Manager Expertise 105 Chapter 8: Using Fund Publications 107 Reading Prospectuses — the Important Stuff, Anyway 107 Cover page 109 Fund profile 109 Fund management and other fund information 116 Investment objectives and risks 116 Investment advisor 120 Financial highlights 122 Reviewing Annual Reports 125 Introduction and performance discussion 125 Investment advisor’s thoughts 127 Performance and its components 127 Investment holdings 131 Investigating the Statement of Additional Information (SAI) 135 Chapter 9: Buying Funds from the Best Firms 137 Finding the Best Buys 137 The Vanguard Group 138 Fidelity Investments 139 Dodge & Cox 140 Oakmark 140 T Rowe Price 141 TIAA 142 USAA 142 Other fund companies 142 Discount Brokers: Mutual Fund Supermarkets 143 Buying direct versus discount brokers 144 Debunking “No Transaction Fee” funds 146 Using the best discount brokers 147 Places to Pass By 148 Hiring an Advisor: The Good, Bad, and Ugly 149 The wrong reason to hire an advisor 149 The right reasons to hire an advisor 150 Beware of conflicts of interest 150 Your best options for help 151 If you seek a salesperson 153 Part 4: Crafting Your Fund Portfolio 155 Chapter 10: Perfecting a Fund Portfolio 157 Asset Allocation: An Investment Recipe 158 Allocating to reduce your risks 158 Looking toward your time horizon 158 Taxes: It’s What You Keep That Matters 163 Fitting funds to your tax bracket 163 Minimizing your taxes on funds 165 Fund-Investing Strategies 168 Market timing versus buy-and-hold investing 168 Active versus index fund managers 169 Putting Your Plans into Action 171 Determining how many funds and families to use 172 Matching fund allocation to your asset allocation 173 Allocating when you don’t have much to allocate 175 Investing large amounts: To lump or to average? 175 Sorting through your existing investments 177 Chapter 11: Money Market Funds: Beating the Bank 179 Money Market Funds 101 180 Comparing money funds with bank accounts .180 Finding uses for money funds 182 Refuting common concerns 183 Grasping what money market funds invest in 189 Choosing a Great Money Market Fund 191 Understanding why yield and expenses go hand in hand 192 Looking at your tax situation 192 Deciding where you want your home base 194 Keeping your investments close to home 194 Considering other issues 194 Finding the Recommended Funds 195 Taxable money market funds 195 U.S Treasury money market funds 195 Municipal tax-free money market funds 197 Chapter 12: Bond Funds: When Boring Is Best 199 Understanding Bonds 199 Sizing Up a Bond Fund’s Personality 201 Maturity: Counting the years until you get your principal back 201 Duration: Measuring interest rate risk 203 Credit quality: Determining whether bonds will pay you back 204 Issuer: Knowing who you’re lending to 205 Management: Considering the passive or active type 206 Inflation-indexed Treasury bonds 207 Investing in Bond Funds 208 Why you may (and may not) want to invest in bond funds 209 How to pick a bond fund with an outcome you can enjoy 210 How to obtain tax-free income 214 Eyeing Recommended Bond Funds 214 Short-term bond funds 215 Intermediate-term bond funds 218 Long-term bond funds 221 Exploring Alternatives to Bond Funds 223 Certificates of deposit 223 Individual bonds 225 Guaranteed-investment contracts 226 Mortgages 227 Chapter 13: Stock Funds: Meeting Your Longer Term Needs 229 Seeing Your Money Grow 230 Be patient 231 Add regularly to your stock investments 233 Using Funds to Invest in Stocks 233 Reducing risk and increasing returns 234 Making money: How funds do it 235 Seeing your stock fund choices 236 The Best Stock Funds 238 Mixing it up: Recommended hybrid funds 239 Letting computers do the heavy lifting: Recommended index funds 243 Keeping it local: Recommended U.S.-focused stock funds 245 Being worldly: Recommended international funds 247 Expanding your horizon: Recommended global stock funds 249 Chapter 14: Specialty Funds 251 Sector Funds: Should You or Shouldn’t You Invest in Them? 252 Landlording Made Easy: Real Estate Investment Trust (REIT) Funds 253 Profiting from What Everyone Needs: Utility Funds 254 Factor Investing and Factor Funds 254 Arming for Armageddon: Precious Metals Funds 255 Crypto Funds: Pathway to Digital Riches? 257 From Energy to Metals: Clarifying Commodity Funds 258 Hedging: Market Neutral (Long-Short) Funds 258 Matching Values to Investments: ESG Funds 259 Evil is in the eye of the beholder 261 Ways to express your social concerns 262 Chapter 15: Working It Out: Sample Portfolios 263 Getting Started 264 Starting from square one: Melinda 264 Silencing student loans: Saanvi, the student 266 Living month to month with debt: Mobile Marcos 268 Competing goals: Gina and George 269 Wanting lots and lotsa money: Pat and Chris 272 Changing Goals and Starting Over 274 Funding education: The Lees 274 Rolling over (but not playing dead): Rafaella 276 Wishing for higher interest rates: Nell, the near-retiree 277 Lovin’ retirement: Noel and Patricia 279 Dealing with a Mountain of Moola 282 He’s in the money: Cash-rich Carlos 282 Inheritances: Loaded Liz 284 Getting Unstuck 285 Chapter 16: Applications, Transfers, and Other Useful Forms 287 Taking the Nonretirement Account Route 287 Filling in the blanks: Application basics 288 Buying into brokerage accounts 293 Preparing for Leisure: Retirement Accounts 297 Retirement account applications 297 What to do before transferring accounts 300 Filling out transfer forms 301 Investing on Autopilot 304 Finding Help for an Overwhelmed Brain 305 Part 5: Keeping Current and Informed 307 Chapter 17: Evaluating Your Funds and Adjusting Your Portfolio 309 Deciphering Your Fund Statement 310 Trade date or date of transaction 310 Transaction description 310 Dollar amount 311 Share price or price per share 312 Share amount or shares transacted 312 Shares owned or share balance 312 Account value 313 Interpreting Brokerage Firm Statements 313 Portfolio overview 314 Account transaction details 314 Assessing Your Funds’ Returns 314 Getting a panoramic view: Total return 315 Focusing on the misleading share price 316 Figuring total return 317 Assessing your funds’ performance 319 Deciding Whether to Sell, Hold, or Buy More 324 Handling bear markets 324 Dealing with fund company consolidations 325 Tweaking and Rebalancing Your Portfolio 325 Chapter 18: The Taxing Side of Mutual Funds 327 Mutual Fund Distributions Form: 1099-DIV 328 Box 1a: Total ordinary dividends 329 Box 1b: Qualified dividends 330 Box 2a: Total capital gains distributions 330 Box 3: Nondividend distributions 330 Box 4: Federal income tax withheld 331 Box 7: Foreign tax paid 331 When You Sell Your Fund Shares 332 Introducing the “basis” basics 332 Accounting for your basis 333 Deciding when to take your tax lumps or deductions 335 Looking at fund sales reports: Form 1099-B 336 Getting help: When you don’t know how much you paid for a fund 337 Retirement Fund Withdrawals and Form 1099-R 337 Minimizing taxes and avoiding penalties 338 Making sense of Form 1099-R for IRAs 340 Withdrawing from non-IRA accounts 341 Understanding form 1099-R for non-IRAs 341 Chapter 19: Common Fund Problems and How to Fix Them 343 Playing the Phone Game 343 Troubleshooting Bungled Transactions 344 Specifying Funds to Buy at Discount Brokers 345 Making Deposits in a Flash 346 Verifying Receipt of Deposits 347 Transferring Money Quickly 347 Losing Checks and Applications in the Mail 348 Changing Options after Opening Your Account 348 Making Sense of Your Statements and Profits 349 Changing Addresses 349 Finding Funds You Forgot to Move 350 Untangling Account Transfer Snags 350 Eliminating Marketing Solicitations 351 Digging Out from under the Statements 352 Getting Older Account Statements 352 Chapter 20: Information Sources: Fund Ratings and Forecasters 353 Entering Cyberspace: What the Internet Is Good For 354 Understanding Online Perils 355 Avoiding the Bad Stuff 356 Looking into market timing and crystal balls 357 Keeping them honest and providing new fodder: The Hulbert Financial Digest 358 Using bogus rankings, token awards, and mystery testimonials 359 Pitching a product: Filler and ads in newsletter form 359 Investing newsletter Hall of Shame 360 Getting In on the Good Stuff 362 Investment Company Institute 362 Morningstar 362 T Rowe Price 365 Securities and Exchange Commission 366 Vanguard.com 366 EricTyson.com 366 Part 6: The Part of Tens 367 Chapter 21: Ten Common Fund-Investing Mistakes and How to Avoid Them 369 Lacking an Overall Plan .369 Failing to Examine Sales Charges and Expenses 370 Chasing Past Performance 370 Ignoring Tax Issues 371 Getting Duped by “Advisors” 371 Falling Prey to the Collection Syndrome 371 Trying to Time the Market’s Movements 372 Following Prognosticators’ Predictions 372 Being Swayed by Major News Events 372 Comparing Your Funds Unfairly 373 Chapter 22: Ten Fund-Investing Fears to Conquer 375 Investing with Little Money 375 Investing in Uninsured Funds 376 Rising Interest Rates 376 Missing High Returns from Stocks 377 Waiting to Get a Handle on the Economy 377 Buying the Best-Performing Funds 378 Waiting for an Ideal Buying Opportunity 378 Obsessing Over Your Funds 379 Thinking You’ve Made a Bad Decision 379 Lacking in Performance 379 Chapter 23: Ten Tips for Hiring a Financial Advisor 381 Communicator or Obfuscator? 381 Financial Planner or Money Manager? 382 Is Your Focus on Market Timing and Active Management? 383 Who’s in Control? 383 Fees: What’s Your Advice Going to Cost? 385 How Do You Make Investing Decisions? .386 What’s Your Track Record? 386 What Are Your Qualifications and Training? 388 What Are Your References? 389 Do You Carry Liability Insurance? 389 Appendix: Recommended Fund Companies And Brokers 391 Index 393