Mutual Funds For Dummies

Eric Tyson is the best-selling author of Personal Finance For Dummies, Investing For Dummies, and co-author of Real Estate Investing For Dummies and Taxes For Dummies. Tyson is a nationally recognized personal finance counselor, writer, and lecturer.

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