Mutual Funds For Dummies

Eric Tyson is a nationally recognized personal finance counselor, writer, and lecturer. He has been featured on and quoted in local and national outlets, including Newsweek, The Wall Street Journal, Los Angeles Times, and others. He has appeared on NBC's Today Show, ABC, FOX NEWS CNBC, PBS Nightly Business Report, and CNN.

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 investments 15

Real estate 16

Gold, silver, and the like 17

Annuities 17

Life insurance 17

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 21

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 29

Fund diversification minimizes your risk 30

Funds undergo regulatory scrutiny 31

You choose your risk level 32

Fund risk of bankruptcy is nil 32

Funds save you from sales sharks 33

You have convenient access to your money 33

Addressing the Drawbacks 35

Don’t worry about these 35

Worry about these (but not too much) 36

Chapter 3: Funding Your Financial Plans 39

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 44

Assess the risk you’re comfortable with 44

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 47

The white picket fence — saving for a home 51

The ivory tower — saving for college 51

Part 2: Evaluating Alternatives To Funds 55

Chapter 4: Selecting Your Own Stocks and Bonds 57

Deciding to Choose Your Own Stocks and Bonds 57

Beware the claims of stock-picking gurus 58

Know the drawbacks of investing in individual securities 60

Understand the psychology of selecting stocks 62

Picking Your Own Stocks and Bonds 63

Chapter 5: Exchange-Traded Funds and Other Fund Lookalikes 65

Understanding Exchange-Traded Funds 66

Understanding ETF advantages 66

Eyeing ETF drawbacks 67

Seeing the pros and cons of trading ETFs 69

Identifying the best ETFs 69

Mimicking Closed-End Funds: Unit Investment Trusts 71

Customizing Your Own Funds Online 72

Chapter 6: Hedge Funds and Other Managed Alternatives 75

Hedge Funds: Extremes of Costs and Risks 76

Getting the truth about hedge funds 76

Investigating hedge funds 78

Wrap (Or Managed) Accounts: Hefty Fees 80

Private Money Managers: One-on-One 82

Robo-Advisors: Automated Investment 83

Part 3: Separating The Best From The Rest 85

Chapter 7: Finding the Best Funds 87

Evaluating Gain-Eating Costs 88

Losing the load: Say no to commissions 88

Considering a fund’s operating expenses 93

Weighing Performance and Risk 96

Star today, also-ran tomorrow 96

Apples to apples: Comparing performance numbers 100

Recognizing Manager Expertise 101

Chapter 8: Using Fund Publications 103

Reading Prospectuses — the Important Stuff, Anyway 103

Cover page 104

Fund profile 106

Other fund information 109

Investment objectives and risks 109

Investment adviser 112

Financial highlights 113

Reviewing Annual Reports 116

Chairman’s letter and performance discussion 117

Investment adviser’s thoughts 120

Performance and its components 120

Investment holdings 120

Investigating the Statement of Additional Information (SAI) 125

Chapter 9: Buying Funds from the Best Firms 127

Finding the Best Buys 127

The Vanguard Group 128

Fidelity Investments 129

Dodge & Cox 130

Oakmark 130

T.Rowe Price 131

TIAA 132

USAA 132

Other fund companies 132

Discount Brokers: Mutual Fund Supermarkets 133

Buying direct versus discount brokers 134

Debunking “No Transaction Fee” funds 136

Using the best discount brokers 137

Places to Pass By 138

Hiring an Adviser: The Good, Bad, and Ugly 139

The wrong reason to hire an adviser 139

The right reasons to hire an adviser 140

Beware of conflicts of interest 140

Your best options for help 141

If you seek a salesperson 143

Part 4: Crafting Your Fund Portfolio 145

Chapter 10: Perfecting a Fund Portfolio 147

Asset Allocation: An Investment Recipe 148

Allocating to reduce your risks 148

Looking toward your time horizon 148

Taxes: It’s What You Keep That Matters 153

Fitting funds to your tax bracket 153

Minimizing your taxes on funds 155

Fund-Investing Strategies 158

Market timing versus buy-and-hold investing 158

Active versus index fund managers 159

Putting Your Plans into Action 161

Determining how many funds and families to use 161

Matching fund allocation to your asset allocation 163

Allocating when you don’t have much to allocate 164

Investing large amounts: To lump or to average? 165

Sorting through your existing investments 166

Chapter 11: Money Market Funds: Beating the Bank 169

Money Market Funds 101 170

Comparing money funds with bank accounts 170

Finding uses for money funds 172

Refuting common concerns 173

Grasping what money funds invest in 178

Choosing a Great Money Market Fund 180

Understanding why yield and expenses go hand in hand 180

Looking at your tax situation 181

Deciding where you want your home base 182

Keeping your investments close to home 183

Considering other issues 184

Finding the Recommended Funds 184

Taxable money market funds 184

U.S Treasury money market funds 186

Municipal tax-free money market funds 186

Chapter 12: Bond Funds: When Boring Is Best 189

Understanding Bonds 189

Sizing Up a Bond Fund’s Personality 191

Maturity: Counting the years until you get your principal back 191

Duration: Measuring interest rate risk 193

Credit quality: Determining whether bonds will pay you back 194

Issuer: Knowing who you’re lending to 195

Management: Considering the passive or active type 196

Inflation-indexed Treasury bonds 197

Investing in Bond Funds 198

Why you might (and might not) want to invest in bond funds 198

How to pick a bond fund with an outcome you can enjoy 200

How to obtain tax-free income 203

Eyeing Recommended Bond Funds 204

Short-term bond funds 204

Intermediate-term bond funds 207

Long-term bond funds 210

Exploring Alternatives to Bond Funds 212

Certificates of deposit 213

Individual bonds 214

Guaranteed-investment contracts 216

Mortgages 217

Chapter 13: Stock Funds: Meeting Your Longer Term Needs 219

The Stock Market Grows Your Money 220

Be patient 221

Add regularly to your stock investments 223

Using Funds to Invest in Stocks 223

Reducing risk and increasing returns 223

Making money: How funds do it 225

Seeing your stock fund choices 225

The Best Stock Funds 228

Mixing it up: Recommended hybrid funds 228

Letting computers do the heavy lifting: Recommended index funds 233

Keeping it local: Recommended U.S-focused stock funds 235

Being worldly: Recommended international funds 238

Expanding your horizon: Recommended global stock funds 239

Chapter 14: Specialty Funds: One of a Kind 241

Sector Funds: Should You or Shouldn’t You Invest in Them? 242

Landlording Made Easy: Real Estate Investment Trust (REIT) Funds 242

Profiting from What Everyone Needs: Utility Funds 243

Arming for Armageddon: Precious Metals Funds 244

Commodity Funds 245

Hedging: Market Neutral (Long-Short) Funds 247

Matching Morals to Investments: Socially Responsible Funds 248

Evil is in the eye of the beholder 248

Ways to express your social concerns 249

Chapter 15: Working It Out: Sample Portfolios 251

Getting Started 252

Starting from square one: Melinda 252

Silencing student loans: Stacey, the student 254

Living month to month with debt: Mobile Mark 256

Competing goals: Gina and George 257

Wanting lots and lotsa money: Pat and Chris 260

Changing Goals and Starting Over 262

Funding education: The Waltons 262

Rolling over (but not playing dead): Cathy 264

Wishing for higher interest rates: Nell, the near-retiree 265

Lovin’ retirement: Noel and Patricia 267

Dealing with a Mountain of Moola 270

He’s in the money: Cash-rich Chuck 270

Inheritances: Loaded Liz 272

Getting Unstuck 273

Chapter 16: Applications, Transfers, and Other Useful Forms 275

Taking the Nonretirement Account Route 276

Filling in the blanks: Application basics 276

Buying into discount brokerage accounts 281

Preparing for Leisure: Retirement Accounts 285

Retirement account applications 285

What to do before transferring accounts 288

Filling out transfer forms 291

Investing on Autopilot 292

Finding Help for an Overwhelmed Brain 293

Part 5: Keeping Current and Informed 295

Chapter 17: Evaluating Your Funds and Adjusting Your Portfolio 297

Deciphering Your Fund Statement 298

Trade date or date of transaction 298

Transaction description 298

Dollar amount 299

Share price or price per share 299

Share amount or shares transacted 300

Shares owned or share balance 300

Account value 301

Interpreting Discount Brokerage Firm Statements 301

Portfolio overview 301

Account transaction details 302

Assessing Your Funds’ Returns 302

Getting a panoramic view: Total return 302

Focusing on the misleading share price 305

Figuring total return 306

Assessing your funds’ performance 307

Deciding Whether to Sell, Hold, or Buy More 312

Handling bear markets 312

Dealing with fund company consolidations 313

Tweaking and Rebalancing Your Portfolio 314

Chapter 18: The Taxing Side of Mutual Funds 315

Mutual Fund Distributions Form: 1099-DIV 316

Box 1a: Total ordinary dividends 317

Box 1b: Qualified dividends 318

Box 2a: Total capital gains distributions 318

Box 3: Nondividend distributions 318

Box 4: Federal income tax withheld 319

Box 6: Foreign tax paid 319

When You Sell Your Fund Shares 320

Introducing the “basis” basics 320

Accounting for your basis 321

Deciding when to take your tax lumps or deductions 323

Looking at fund sales reports: Form 1099-B 324

Getting help: When you don’t know how much you paid for a fund 325

Retirement Fund Withdrawals and Form 1099-R 325

Minimizing taxes and avoiding penalties 326

Making sense of Form 1099-R for IRAs 326

Withdrawing from non-IRA accounts 328

Understanding form 1099-R for non-IRAs 329

Chapter 19: Common Fund Problems and How to Fix Them 331

Playing the Telephone Game 332

TroubleShooting Bungled Transactions 332

Specifying Funds to Buy at Discount Brokers 333

Making Deposits in a Flash 334

Verifying Receipt of Deposits 335

Transferring Money Quickly 335

Losing Checks and Application Papers in the Mail 336

Changing Options after Opening Your Account 336

Making Sense of Your Statements and Profits 337

Changing Addresses 337

Finding Funds You Forgot to Move 338

Untangling Account Transfer Snags 338

Eliminating Marketing Solicitations 339

Digging Out from under the Statements 340

Getting Older Account Statements 340

Chapter 20: Information Sources: Fund Ratings and Forecasters 341

Entering Cyberspace: What the Internet Is Good For 342

Understanding Online Perils 343

Avoiding the Bad Stuff 344

Looking into market timing and crystal balls 345

Keeping them honest and providing new fodder: The Hulbert Financial Digest 346

Using bogus rankings, token awards, and mystery testimonials 346

Pitching a product: Filler and ads in newsletter form 347

Investing newsletter Hall of Shame 347

Getting In on the Good Stuff 350

Investment Company Institute 350

Morningstar Mutual Funds 350

The Independent Adviser for Vanguard Investors 354

T.Rowe Price 354

Securities and Exchange Commission 354

Vanguard.com 355

EricTyson.com 355

Part 6: The Part of Tens 357

Chapter 21: Ten Common Fund-Investing Mistakes and How to avoid them 359

Lacking an Overall Plan 360

Failing to Examine Sales Charges and Expenses 360

Chasing Past Performance 360

Ignoring Tax Issues 361

Getting Duped by “Advisers” 361

Falling Prey to the Collection Syndrome 361

Trying to Time the Market’s Movements 362

Following Prognosticators’ Predictions 362

Being Swayed by Major News Events 362

Comparing Your Funds Unfairly 363

Chapter 22: Ten Fund-Investing Fears to Conquer 365

Investing with Little Money 365

Investing in Uninsured Funds 366

Rising Interest Rates 366

Missing High Returns from Stocks 367

Waiting to Get a Handle on the Economy 367

Buying the Best-Performing Funds 367

Waiting for an Ideal Buying Opportunity 368

Obsessing Over Your Funds 368

Thinking You’ve Made a Bad Decision 369

Lacking in Performance 369

Chapter 23: Ten Tips for Hiring a Financial Adviser 371

Communicator or Obfuscator? 371

Financial Planner or Money Manager? 372

Market Timing and Active Management? 373

Who’s in Control? 373

Fees: What’s Your Advice Going to Cost? 374

How Do You Make Investing Decisions? 376

What’s Your Track Record? 376

What Are Your Qualifications and Training? 378

What Are Your References? 379

Do You Carry Liability Insurance? 379

Appendix: Recommended Fund Companies and Discount Brokers 381

Index 383