Mutual Fund investment right now?

Question

Well, I am opening up a Roth IRA with two mutual funds. The Wellesley Fund and Life Care Mod growth but I put down $3,000 in each. Is that good or a bad IDea... I looked at the "Who should invest" that fits me, the charges they have no fees... the expense rations are also low. Both funds are balanced funds. I haven't yet submitted but so far those two are optimal...

lifestrategy

Answer 1

Congratulations on opening a ROTH IRA as well as for wanting to take charge of your investments!

While I can't speak specifically to that mutual fund, in general they're not the best vehicle for most people.

Overall, Mutual funds are not good (once you're educated in investing) and many people should not invest in mutual funds unless you have to (like if it were a requirement in a 401K).

For me, I would NOT invest in mutual funds if it weren't for having a 401K.

Here's why.

First of all, mutual funds exist to take average person's money.

Second, mutual funds seem to be "happy" just to do better than the S&P index, since that's often the gauge. A monkey, yes monkey, can usually outpick most mutual funds. Over 60% of the mutual funds out there can't even outperform the market (CNBC just reported the current # was 72%). That's VERY SAD!

Third, mutual funds have embedded management fees in their costs. Most of these mgmt fees are 0.5% to 2% annually. This is one of the reasons they can’t outperform the market; they take a cut out regardless of how well or poorly they do!

Fourth, most mutual funds exist not to earn you a lot of money, but are more interested in NOT "losing" you lots of money. That way you stay with them and they continue to collect their fees. Did they not highlight to you that they take this fee each and every year regardless of how poorly they do?

Fifth, mutual funds are not as liquid as one might think. If you're in mutual funds and a Bush talks in the morning and you call your broker to sell because the market is now tanking, the broker will gladly take your order, but the order will not be executed until the day is over and the negative impact is already priced into the fund.

Sixth, many mutual funds charge extra "fees" if you buy/sell their fund within a certain amount of time, meaning you must keep your money in the fund 90 days to 2 yrs before you're free from the fees (read the fine print on trying to get a withdrawal). These fees can be up to 3% or so of your money as well.

Seventh, mutual funds have to be in the market. So if the market is crashing or going down like it has between May and now, then the funds still have to be in the market and taking those losses too. With some practice, you can time your monies to avoid some of those losses (it'll take practice).

Convinced yet? Need more?

Eighth, mutual funds have to be pretty diversified and so if there are hot and cold sectors, they are probably in both the hot sectors and cold sectors. However, as an investor, you can buy into just the sectors you want, like metals, or housing, or energy, etc. or right now, Brokers/Dealers, Retail, and insurance!

Ninth, mutual funds are so big, they can only invest in certain companies. A small mutual fund with $10 billion in assets. 1% of that money is $100 million. How many companies are this big where $100 million investment isn't the whole company? Do you want to limit yourself to just those larger companies like Times Warner, Microsoft, home depot, Cisco, Ebay which have been sideways for years? I think not.

A better way would be to buy ETFs (exchange traded funds) or holders. These trade like stocks, so are very liquid, and do not have the high fees like the mutual funds. Further, you can buy/sell them as you wish. They represent sectors or indexes, so buying them gives you the same diversification as the sector/industry/index, but with much less overhead!

See Amex.com (american stock exchange) or ishares.com, holders.com for more info.


You need to invest for yourself. If you can't, then sure, use mutual funds. But be aware of the shortcomings (and as you can see, there are many).

Let me know if you have further questions.

Best of luck!

Answer 2

I congratulate on your decision to begin investing. I think the sooner you start the better it is. However, I am not a big fan of mutual funds. For once, most of the mutual funds will lag behind an index fund after factoring in for management expenses. Second, I think you could do a much better job investing for your self directly in the stock market provided you have done enough research. So I would say, index funds are the best way to go since they offer better returns than mutual funds. In the mean time, read read read to find out more about the stock market. Remember, the stock market is the ONLY market where buyers run for the exits when there is a sale (refering to the corrections, drops, etc). So being a contrarian would benefit you.

Answer 3

Do you mean LifeSTYLE Moderate Growth? I can find no Life Care.

At any rate, the funds look fine--especially Vanguard's--but it's a pretty conservative mix. Between the two, you'll be holding about 50% bonds. That's fine if you're a very conservative investor, but you should know that over the long haul, your return most likely won't be as good as it would be if you had more of a stock-heavy portfolio.

I would suggest substituting an all-stock fund for one of these, if you're still far away from retirement. If you're conservative, you could go with a largecap Value fund. Value is less volatile than Growth, yet it's actually outperformed Growth in the last 15 years.

In response to Faye: He could make last year's contribution AND this year's contribution if he does it before April 15th, and then he could contribute the whole $6000.

Answer 4

It's hard to tell from your description of the funds whether or not you will have adequate diversification among asset classes. Most investment professionals recommend having exposure to many different types of assets. Mutual funds generally invest in either stocks or bonds. Then, within these broad categories, there are further distinctions. For example, some categories for stocks are small-, mid-, and large-cap, stocks, US and international stocks, and growth and value stocks. For bonds, there are government bonds, high-grade corporate, and high-yield corporate, among others.

If the funds you chose are what are often called "asset allocation" funds, then the managers may be doing the diversification for you. Otherwise, you may want to choose a variety of funds that invest in different asset classes.

The amount of exposure you should have to stocks vs. bonds, and the different types of stocks and bonds, depends on your age (or time until retirement) and how much risk you want to take on, among other factors. I would recommend talking to a professional at the company administering your Roth IRA so that you can get some more clarity on these issues and feel comfortable with your choices.

Congrats on your investments and good luck!

Answer 5

First, your maximum contribution for 2006 (if you're investing for last year) is $4000 ($5,000 if you are over 50) so you can't put $3,000 into each. 2007 is also $4000 so if you're investing for this year, you still can't.

The two funds you chose look fine. You just need to change it to $2,000 in each fund or $2500 if you're over 50.

Check the link below for eligibility and contribution limits.

In response to LongArm - True. The way he stated his question though, it sounded like he was doing it in one year but if he did 2006 before April 15, and also did his 2007 contribution,he could actually manage to get $8000 in this year (or $10,000 if he's over 50)

Answer 6

how are they doing? did u look at their morningstar rating? Do you have a standard IRA also? Does your company offer a 401K with matching funds? That should be the first place to invest.

Answer 7

id say yes.assets are always good.