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Mutual funds for dummies - Tyson E

Tyson E. Mutual funds for dummies - Wiley publishing , 1998. - 425 p.
ISBN 0-7645-5112-4
Download (direct link): mutualfundsfordummies1998.pdf
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The examples that follow are arranged somewhat by level of difficulty, from the simpler cases to the more complex.
Starting Out
If you’re just starting to get your financial goals together, you’re hardly alone. If you’re still in school or otherwise young and new to the working world, good for you if you want to get on the right investing road now! Regardless of your age, though, remember that it’s never too late. Just get started.
Beginning at ground zero: Melinda
Melinda is in her 20s, works as an architect, earns decent money, lives in New Jersey, and has no debt and no savings yet because she just started her first job. Financially speaking, she’s a blank slate, but because she made a New Year’s resolution to get her finances in order, she wants to do something.
Her employer offers her health and disability insurance and a profit-sharing retirement plan, which only her firm may contribute to, but to which small contributions have been made in the past. She wants to invest in mutual funds but doesn’t want hassle in either paperwork or complications on an ongoing basis.
On a monthly basis, she figures that she can save $600. She wants to invest for growth. With her money earmarked for long-term future needs such as retirement, she sees no need to invest conservatively (even though she does
Chapter 10: Working It Out — Sample Portfolios
want some of her investments more conservatively invested). She’s in the 28 percent federal tax bracket now, but as her experience in her field increases, she expects to earn more and soon will edge into the 31 percent federal tax bracket.
Recommendations: Melinda should consider investing $2,000 annually in a Roth IRA (see Chapter 3). In her case, a regular IRA contribution won’t be tax-deductible because her employer offers a retirement plan under which she is considered covered and because she earns more than is allowed to make a tax-deductible contribution to a regular IRA.
She’s willing to be aggressive, so she could invest her first two years’ IRA contributions in a couple of good funds that invest exclusively in stocks at Fidelity — maybe, for example, Fidelity Disciplined Equity or Stock Selector and Fidelity Low Priced Stock.
Melinda could establish her IRA account through Fidelity’s discount brokerage division, which allows purchasing Fidelity and non-Fidelity funds through one account. Because Fidelity assesses a $12 fee if an IRA fund balance is less than $2,500, sticking with two funds over a few years so as to build each fund’s balance above $2,500 would be a wise move. Warburg Pincus International Equity or USAA International would be a good foreign fund to add.
Like everyone else, Melinda should have an emergency source of cash. Although the mutual funds that she’s investing in outside her retirement account are liquid and can be sold any day, she runs a risk that an unexpected emergency could force her to sell when the markets are hungover.
With family to borrow from if needed, she could make do with, say, a cushion equal to three months’ living expenses. She could even postpone building an emergency fund until after she funds her IRA. (Normally I would recommend establishing the emergency fund first but since she has family she could borrow from, I believe that it’s okay to go for the long-term tax benefits of funding the IRA account.) Because she won’t keep a large emergency balance, she could keep her emergency fund in her local bank account, especially if the balance helps keep her checking account fees down. Otherwise, she could invest in Vanguard’s New Jersey Tax-Free Money Market Fund.
If Melinda lived in a state without a good state-specific money market fund (see Table 7-1 in Chapter 7), she could simply use the Vanguard Municipal Money Market fund, which is federally tax-free.
Part II: Establishing a Great Fund Portfolio
For longer-term growth, Melinda could invest her monthly savings as follows (the following funds are reasonably tax-friendly, which is important because she’s investing outside a retirement account and is in a reasonably high tax bracket):
50%-70% in Vanguard Index Total Stock Market
30%-50% in Vanguard International Growth or Total International Index
These two funds pay very low dividends and, historically, have made modest capital gains distributions. They require a $3,000 minimum initial investment so Melinda needs to save the minimum before she can invest. After the minimum is met and invested in each fund, she can have money deducted electronically from her bank checking account and invested in these mutual funds.
Silencing student loans: Staceg the student
Stacey is a 25-year-old graduate student in psychology with three years to go before she gets her well-deserved degree. She’s hoping that all this education will fetch her a decent income when she finally gets out of school.
Her current income amounts to about $16,000 per year. She’s also sitting under $15,000 of student debt from her undergraduate days. Both of her loans are in deferment so she’s not obligated to make payments until she finishes graduate school: One is incurring interest at 8.75 percent per year; the other is subsidized, meaning that the government is paying the interest until she gets out of school.
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