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Colleen's Corner

Asset Allocation

Often financial "experts" make asset allocation difficult to understand. My goal in this series of articles is for you to understand asset allocation thoroughly, in an easy to understand format.
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Retirement and Mutual Funds

Retirement Calculator, Inc.
Retirement and Mutual Funds

Retirement and mutual funds seem to go together like bread and butter.  Mutual funds are when people pool their money together and use it to buy securities.  These investors each own shares in the mutual fund in direct portion to the amount they have invested.  Each share represents ownership of part of securities owned by the mutual fund.  The price of a share is based on the current value of the fund's investments.  If the fund's investments increase in value, then the fund share price rises. Conversely, if the fund's investments decrease in value, then the fund share price declines.

At the end of every trading day, the fund totals the value of all the securities in its portfolio and divides the portfolio value by the number of shares outstanding.  This gives you the mutual fund's net asset value (NAV) - the price of a single share of the fund.  See the formula below.

NAV = Total Value of Assets Owned by a Fund - Fund Liabilities
Number of Shares Outstanding

Mutual funds have many advantages and disadvantages. The biggest advantage to investing through a mutual fund is its diversification. Fees, on the other hand, are a fund's largest disadvantage.  Fees are used to pay professional money managers to direct the mutual fund.  Fees charged by mutual funds vary.  Legally a mutual fund can charge each of the following fees as long as it lists it in its prospectus. 

  1. Sales load (also called a front-end load): This fee takes a portion of your money upfront before investing the rest in its fund.  [For example: You have $1,000 to invest.  The mutual fund charges a 3% sales load.  Thus, only $970 in actually invested in the fund].
  2. Redemption fee (also called a back-end load): this fee takes a portion of your money when you sell your shares of the fund.  [For example: Your shares are valued at $1,000.  The mutual fund charges a 5% redemption fee. Thus, you only receive $950].
  3. Management fees.  These fees are an annual fee paid to the professional money manager who directs the fund's investments. [For example: You have $1,000 invested in a mutual fund on December 31st, which has a management fee of 1%.  Thus, on January 1st, you will only have $990, because of the management fee].
  4. 12b-1 fees.  These are fees charged by the mutual fund to provide information to potential investors (i.e. an advertising fee).  [For example, you have a $1,000 invested in a fund with a 0.50% 12b-1 fee. You will have only $995 after the fee is deducted from your account].

An alternative to investing in mutual funds for your retirement is joining an investment club.  Investment clubs are a group of people who pool their money to buy securities, just like mutual funds.  These groups meet on a regular basis, either in person or online.  During these regular meetings, the members of the club socialize, study stocks and learn about investing and personal finance.  They offer all the advantages of a mutual fund, but less the fees that can quickly drain a portfolio.  You can learn more about investment clubs from the industry leader BetterInvesting.

The key to developing a successful retirement portfolio is not to simply choose the right mutual funds, although that can be an important element. But, rather to educate yourself about finance and investing so you can choose the best investments for your goals. 

How do I educate myself on the latest news impacting my retirement?

To keep informed about retirement topics, try a FREE membership to Retirement Intelligence Information Services. At no cost to join, you will receive a bi-monthly newsletter full of financial information to inform and empower you to have a successful retirement. As an added bonus, www.retirementcalc.com will include the Retirement Calculator Software Version 2.0 (a $24.95 value seen live on CBS TV) for FREE.

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