| Many find investing to be something of a | | | | not what many would consider actively managed. |
| mystery. Should you buy stocks, bonds, T-bills or | | | | For these reasons index funds tend to appeal to |
| real estate? It seems that for every person that | | | | more conservative investors. |
| gets rich investing in one spot a hundred others | | | | Another choice available is that of the sector fund. |
| lose a fortune. In an age where you are | | | | These types of funds focus on one particular |
| constantly hearing about diversification and asset | | | | portion of the economy and invest within it. Let's |
| allocation the emergence of mutual funds seems | | | | take the Oak Associates Red Oak Technology |
| to have hit an all time high. Promises abound of a | | | | Select Fund. The fund looks for long-term growth |
| fund that's right for everyone. But how do you | | | | by investing primarily in companies which rely on |
| know if it's right for you? Our office constantly | | | | technology in their products or operations. The |
| fields the question: What is the best investment | | | | expectation is that the companies will benefit |
| for my money? The only answer we give them | | | | from technological advances and improvements |
| is a definitive: it depends. | | | | and thus be profitable. Its inception in 1998 was |
| Many are already invested in mutual funds | | | | prompted by the expotential growth experienced |
| through their 401k, IRA's, brokerage accounts or | | | | by the technology sector at the time. Many funds |
| variable annuities. But how do you know if you've | | | | with that focus outperformed the indexes and |
| chosen correctly? The first order of business is to | | | | equity funds in the late 90's. Of course the last |
| look at their purpose and the different types | | | | five years have shown the inherent risks |
| available. The basic premise of a mutual fund is | | | | associated with these types of investments. The |
| that a manager or management team oversees | | | | growth potential can be great but, as illustrated |
| the buying and selling of equities. The idea is to | | | | by the rise and fall of technology the last ten |
| spread capital, supplied by a pool of individual and | | | | years, it can also be the most risky. Many |
| or institutional investors, among various equities | | | | individual investors choose to avoid sector funds |
| and thus offer diversification within one | | | | because of the volatility associated with them. |
| investment. | | | | However large institutional investors often use |
| There are literally thousands of funds that cover | | | | them to diversify their portfolios. |
| the spectrum of small, mid, large cap growth and | | | | One of the most recent offerings to the mutual |
| value stock sectors. There are also a host of | | | | fund market are known as target maturity or |
| aggregate, income, short and long-term bond | | | | target-date retirement funds. Although relatively |
| funds available. And then there are many | | | | new, the concept of these funds is based in the |
| offerings of both in what are considered blended | | | | idea that one must be diversified and change their |
| funds. This is when a combination of stocks and | | | | portfolio over time. Like blended funds, they |
| bonds are combined in certain ratios to create a | | | | possess both stock and bonds. The unique |
| portfolio based to be conservative, moderate or | | | | feature is that they are based around a particular |
| aggressive. Choices are further complicated | | | | retirement year. The further out the retirement |
| depending on the goal, asset size and | | | | year the higher the ratio of stocks is within that |
| management style of the each fund. | | | | fund. As the time horizon for retirement nears |
| In the realm of equity funds lets take American | | | | the portfolio moves out of stocks and more into |
| Funds' flagship, the Growth Fund of America. It | | | | cash and bonds. As an example we can look at |
| has a long-established track record of consistent | | | | State Farm's LifePath 2040 fund which is |
| performance as a large cap growth fund. Their | | | | managed by Barclay's. This fund currently has |
| largest holdings include: Google, Microsoft, Lowes | | | | almost 87% of its portfolio in stocks with the |
| and Target. Yet each stock constitutes no more | | | | balance in cash and bonds. As the fund |
| than three percent of the overall portfolio. To put | | | | approaches maturity the portfolio will move to |
| this in perspective the total asset holdings of the | | | | have approximately 62% of its holdings in bonds |
| fund, as of 2005, are approximately $114.7 billion | | | | and the rest of the balance in real estate, money |
| dollars. This means that investors who do not | | | | markets and large cap stocks. The appeal of |
| want to buy individual stock in these companies | | | | these funds is that an investor can put their |
| can purchase shares of this fund and still | | | | money for retirement in one place and allow |
| participate in the market. The main goal of these | | | | professional management to track the portfolio |
| types of equity funds is to beat the respective | | | | over time. The goal is to capitalize on the growth |
| index in which they participate. Investing in a | | | | of the equity market early on in the fund's |
| quality fund that performs well often makes | | | | existence and then protect that growth by |
| these suitable for those that are more | | | | moving capital to the security of more stable |
| comfortable with risk. This is an example of an | | | | investments. |
| actively managed fund whose performance helps | | | | Mutual funds offer several advantages regardless |
| to justify the expenses associated with the fund | | | | of the type you choose. The first is diversification, |
| and others like it. The main appeal is | | | | a variety of investments rather than putting |
| management's track record of good returns | | | | money in one single entity. The second is liquidity, |
| relative to the index. For this reason, more | | | | the ability to redeem your shares for cash fairly |
| aggressive investors may be willing to pay the | | | | quickly. Keep in mind that there can be fees or |
| related fees for the additional gains. | | | | penalties associated with this liquidation. The third |
| That being said there are index funds available. | | | | advantage is to have someone manage your |
| For example, stock index funds look only to | | | | money, either actively or passively, without the |
| mirror returns of a specified benchmark or index. | | | | investor having to watch it every day. In the |
| The goal is to match it by buying representative | | | | next installment we will be taking a look at the |
| amounts of each stock in the index. This avoids | | | | moving parts of a mutual fund to help you see |
| the expense of paying a manager to try to boost | | | | how they work. |
| performance by choosing their own stocks or | | | | Please note: This article is in no way an |
| implementing their own strategies. Rather, index | | | | endorsement or detraction of any company or |
| funds just seek to come as close as possible to | | | | fund mentioned above. Examples are for |
| equaling that market's index. Take the example of | | | | illustrative purposes only and do not constitute |
| the first index fund, the Vanguard S&P 500 | | | | whether or not you should invest in any vehicle |
| Index Fund. Since its inception it has nearly | | | | mentioned. Always consult with your financial |
| matched the Standard & Poor's 500 Index. It | | | | professional or advisor before investing and |
| does actually out-perform many funds because of | | | | always carefully read any prospectus before |
| it's performance combined with lower expenses. | | | | making any decisions. |
| Index funds generally carry lower fees and are | | | | |