Mutual funds were long considered one of the best available easy-to-invest instruments that minimized risk and maximized returns. In the 80’s and 90’s, the US financial markets made trillions of dollars with the mutual fund structure. The funds, especially the most actively managed ones, were expected to outperform the market index in the long run. However, with expense ratios ranging as high as 1.5% to 2.5%, the funds underperformed the index by the amount of their expense ratio.
What is an expense ratio and how does it reduce performance? Investors use expense ratio as a major metric to decide on investment products. Expense ratio in a mutual fund is comprised of the investment management fee, a 12b-1 fee, also known as the cost of distribution, and other operating expenses. A shareholder pays the fee on a daily basis through an automatic reduction in the price of a fund. If you invested in an exotic mutual fund with an expense ratio of 2.5%, after 30 years, you would have only $87,550 and paid a whooping $86,944 (almost 50%) in expense fee. Let’s look at another example. If you invested in a fund with an expense ratio of 0.5% (typical for index funds), after 30 years you would have $152,203 and paid a total of $22,291 (or 12.8%) in expenses. So high expense ratios can really hurt your investment performance.
Exchange traded funds or ETFs, as they are known, far eclipse mutual funds for their biggest benefit amongst others, the low expense ratios. Expense ratio for a mutual fund goes beyond 1.5%, while for an index fund is 0.19%, but a typical ETF expense ratio is only as low as 0.13%. What that means is you could simply buy the index with a low-cost ETF and outperform almost all mutual funds over the long term by at le...
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...short of spectacular. Invented in 1993, they started with one domestic fund and have since growth to more than 1100 ETFs that track domestic and global indexes, sectors, even alternative investments like water, timber, clean energy and solar. And there are more coming online everyday. The new funds offer long exposure in areas like China, Emerging Markets, the Wilshire Total Market Index and leveraged short exposure in the Russell 3000, DJ Wilshire Total Market and a host of country specific funds like Brazil, Mexico, South Korea and region specific like Latin America, Europe and the Pacific.
Given the flexibility, diverse options, tax and expense advantages, ETFs present an attractive option that every investor should consider for his portfolio, particularly in these difficult times and when 401ks are IRAs are more important than ever to our financial futures.
Student Answer: Professional management and diversification are the major reasons investors purchase mutual funds, as well as they are easy to invest in for beginning investors or those who lack large amount of money as required by other types of investments. Investment companies are employed with experienced and profession fund managers who research and devote a lot of time to finding the perfect securities for their investment portfolios. The diversification allows for gains, even in a loss, because one investment in a mutual fund can offset the loss of another by it’s gains. Basically, your investments are scattered around and offer somewhat of a safety net for your
I think that this company is a good place to place my money. They have been around since before the great depression and they survived all the economic downturns that had to do with the Cold War with Russia after World War two. CF Industries has been around for many years and they are going to be around for many more they are the top rated in their industry and they are trying to increase their own profits even though the price of their product dropped to no fault of their own.
"Who Should Invest With Us - Edward Jones: Making Sense of Investing." Edward Jones. Web.
The company today is now in one-hundred different countries today, and is a private detective agency. The entire agency was founded by Allan Pinkerton, who wanted to stop counterfeiters and protect trains from being robbed. They ended up doing so much more than that. They did spy work for the Union states, protect the President, and even start the first ever database for criminals. The agency has made an enormous impact on the entire world today.
Consistently above average performance and competitiveness of the majority of Vanguard funds (Exhibit 2). Quality driven corporate culture. One of the highest loyalty scores in the industry, with a redemption rate below the industry average. Good reputation. Weaknesses Low brand and advertising awareness.
20.7%, even as the S&P 500 fell 10.1%. At the end of June 2001, the fund's year-to-date returns stood at 6.4% versus −7.3% for the S&P 500.
The analysis of these ratios shows how Ford stands as a company for the past five years. Return on equity (ROE) reveals how much profit a company earned in comparison to the total amount of shareholder equity on the balance sheet. For long-term investing with great rewards, companies that have high return on equity ratios can provide the biggest payoffs. This ratio also tells investors how effectively their capital is being reinvested, so it is a good gauge of management's money handling skills. Ford is showing a considerable turn around in this area this past year, which could easily be due to changes in management. They are also reasonably following the industry in this area.
Ross, S.A., Westerfield, R.W., Jaffe, J. and Jordan, B.D., 2008. Modern Financial Management: International Student Edition. 8th Edition. New York: McGraw-Hill Companies.
It was established in May 1981 as a trading business with an initial focus on cement and overtime the business diversified into a conglomerate trading of cement, sugar, flour, salt and fish. As at early 1990s, the business had grown into one of the largest trading conglomerates operating in the country.
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
Efficiency ratios reveal how effectively a company uses its assets and liabilities and is a good general indicator of how well the day to day operations are managed. (McLaney, 2009)
According to Investopedia (Asset Allocation Definition, 2013), asset allocation is an investment strategy that aims to balance risk and reward by distributing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. There are three main asset classes: equities, fixed-income, cash and cash equivalents; but they all have different levels of risk and return. A prudent investor should be careful in allocating each asset class to his portfolio. Proper asset allocation is a highly debatable subject and is not designed equally for everybody, but is rather based on the desires and needs of the individual investor. This paper discusses the importance of asset allocation, the differences and the proper diversification within the portfolio.
Prior to 2005 Morgan Stanley had no economical advantage, now with changes implemented in a competitive industry such as this Morgan Stanley's strength of employees, global product range and leading market share for Institutional Securities, Global Wealth Management and Asset Management has the firm making strong profits.
As an investor with several types of securities, I am looking for long-term stability towards a retirement fund. The combination of several different stocks and mutual funds allows for the safety of the investments. By investing long-term in different accounts, I have the ability to gain more in the long-run with less risk of not lose all my savings on one investment.
Using the Modern Portfolio Theory, overtime risk assets will provide a higher expected rate of return, as compensation to the investors for accepting a high risk. The high risk will eventually lower collecting asset classes to the portfolio, thus reducing the volatile risk, and increasing the expected rates of return. Furthermore the purpose of this theory is to develop the most optimal investments portfolio which would yield the highest rate of return while ascertaining the risk for the individual or corporate investor.