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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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Recommendations: Although Mark has the best of intentions, he’s a good example of someone who has managed to get his financial priorities out of order. Mark’s best and most appropriate investment now is to pay off his credit card and auto loan debt and forget about fund investing for a while. These debts have interest rates ranging from 10 to 15 percent, and paying them off is actually his best investment.
Like millions of others, Mark got into these debts because credit is so easily available and encouraged in our society. Such easy access to borrowing has encouraged Mark to spend more than he has been earning. Thus, one of the first things he should do is figure just where his money goes in a typical month. By using his credit card statement, checkbook register, and memory of items he has bought with cash, Mark can determine how much he is spending on food, clothing, transportation, and so on. He needs to make some tough decisions about which expenditures he’ll cut so that he can “save” money to pay off his debts.
Chapter 10: Working It Out — Sample Portfolios
Like Melinda (the 20-something architect in the first example), Mark should also build an emergency reserve. If he ever loses his job, becomes disabled, or whatever, he’d be in real financial trouble. Mark has no family to help him in a financial pinch, and he’s close to the limits of debt allowed on his credit cards. Because he often draws his checking account balance down to a few hundred dollars when he pays his monthly bills, building up his reserve in his checking or savings account to minimize monthly service charges makes the most sense for him now. Recently, Mark eliminated about $100 per year in service charges by switching to a bank that waives these fees if he direct-deposits his paycheck.
Mainly by going on a financial austerity program — which included sacrifices such as dumping his expensive new car and moving so that he could walk or bike to work — within three years, Mark became debt-free and had accumulated several thousand dollars in his local bank. Now he’s ready to invest in mutual funds.
Recommendations: Because his employer offers no retirement savings programs, the first investment Mark should make is to fund a $2,000 individual retirement account (IRA). Mark does not want investments that can get clobbered: He thinks that he has been late to the saving game and doesn’t want to add insult to injury by losing his shirt in his first investments. Being a conservative sort, Mark thinks that Vanguard makes sense for him. For his IRA, he can divide his money between a hybrid fund such as Vanguard Wellington (70 percent) and an international stock fund such as Vanguard International Growth (30 percent). In addition to his new $2,000 contribution, Mark also should transfer his $5,000 bank CD IRA into these funds.
Now debt-free, Mark thinks that he can invest about $400 per month in addition to his annual IRA contribution. His income is moderate, so he’s in the 28 percent federal tax bracket. He wants diversification, but he doesn’t have a lot of money to start his investing program. He has set up automatic investment plans whereby each month the $400 is invested as follows (note that many of these funds have a minimum initial investment requirement of $1,000 and that some of them waive that minimum if you invest via electronic funds transfer):
30% in American Century-Benham CA Tax-Free Intermediate or Long-Term Bond fund
30% in T. Rowe Price Spectrum Growth
20% in Neuberger & Berman Focus
20% in Warburg Pincus International Equity or Vanguard International Growth
Part II: Establishing a Great Fund Portfolio
Competing goats: Gina and George
George works as a software engineer and his wife Gina works as a paralegal. They live in Virginia, are in their 30s, and have about $20,000 in a savings account, to which they currently add about $1,000 per month. This money is tentatively earmarked for a home purchase that they expect to make in the next three to five years. They figure that they will need a total of $30,000 for a down payment and closing costs; they are in no hurry to buy because they plan to relocate after they have children in order to be closer to family (the allure of free baby-sitting is just too powerful a draw!).
Justifiably, they’re pleased with their ability to save money — but they’re also disappointed with themselves for leaving so much money earning so little interest in a bank. They figure that they need to be serious about investments because they want to retire by age 60, and they recognize that kids will cost money.
George’s company, although growing rapidly, does not offer a pension plan. In fact, the only benefits his company does offer are health insurance and a 401(k) plan that George is not contributing to because plan participants cannot borrow against their balances. Gina’s employer offers health insurance, $50,000 of life insurance, and disability insurance — but, like George’s employer, Gina’s employer does not offer a retirement savings plan.
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