Buying Mutual Funds Titling fund ownership Individual Joint Tenants with Right of
Survivorship Equal owners Tenants in Common
Can be unequal ownership Assets don’t transfer automatically at death
Gifts or Transfers to Minors UGMA or UTMA (TN - both)
http://www.finaid.org/savings/ugma.phtml UTMA is more flexible Adult owner or custodian
minors do not have contract rights fiduciary responsibility
Transfers at majority (TN: UGMA – 18; UTMA – 21)
$14,000 per year Taxes – First $850 tax free, next $850 at
child’s rate, anything more at parent’s rate
What to Look For Retirement plans Automatic Investment Plans Automatic Reinvestment Transaction
Phone or computer Website Exchange privileges Check writing Withdrawals
What You Get Trade confirmation (email) Account statements (monthly,
quarterly or annual, or a combination)
Form 1099-DIV Form 1099-B: sales reported to IRS Form 1099-R: IRA or annuity
distributions Shareholder reports (annual and
semiannual)
Fund Supermarkets Basically a brokerage account
May just be for mutual funds Consolidated record keeping Lower custodial fees Easier to switch families (tax-loss
harvesting) Margin - maybe
Financial Advisors BEWARE!!! DO YOUR HOMEWORK Ask about fees Ask for references Check arbitrations – NASD CFA CFP CLU and ChFC – life insurance Personal Financial Specialist – CPA with
financial planning training
Asset Allocation Individual decision Income or growth Rebalancing
tax implications 90% of portfolio performance is
asset allocation, not security selection
Asset Allocation Risk and Return Questions
Age Objectives - time Risk tolerance Investment size How much are you involved? Taxes
Stock funds Market capitalization Growth or value
P/E, P/CF/ P/B Dividend yield Cyclical or defensive Fundamental or technical Concentrated or not
Bond Funds Why invest in bonds funds:
Liquidity Capital preservation – less volatile Income Diversification
Bond FundsWhat to Look For
Credit quality Maturity – duration Taxability Type of bond
Government, corporate, asset backed, convertible
Country of origin Indexing – probably not
Taxability Taxable fund – 8% Tax rate – 39% Equivalent aftertax return
R = Rpretax(1 – t) R = 8%(1 - .39) R = 4.88%
State vs. Federal
Market Indices DJIA S&P 500 Wilshire 5000 (actually more
>7,000) Wilshire 4500 (Wilshire 5000 –
S&P500) Russell 3000 (98% of market
value) Russell 1000 (largest 1,000) Russell 2000 (1,001 to 3,000)
Mutual Fund Performance
E(R) – Rf = + β[E(RM) – Rf]
Sharpe ratio = (R – Rf) /
Sortino = (R – Target) / (downside)
Performance PersistencePretax alpha
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
1 2 3 4 5
1
3
5
7
10
Repeat Winners – above median performance
Fi gur e 1: P er c entage of R epeat Wi nner s by Y ear
0. 0
10. 0
20. 0
30. 0
40. 0
50. 0
60. 0
70. 0
80. 0
90. 0
100. 0
I n it ial Y ear
Repeat
Winners
Required
Winners