Mutual Funds and Stock Brokers

1. Mutual Funds and Stock Brokers October , 2009

2. This Week: Getting Started Choosing a Broker Account Types Investing in Funds Club Portfolio

3. Choosing a Broker

4. What to Look For • Stockbroker - is a regulated professional broker who buys and sells shares and other securities • Acts as the middle man • (Hidden) Fees • Commission Rates • Branch Offices vs. Online • Customer Service

5. Broker Comparison • Pay attention to miscellaneous fees, especially those that you are likely to incur • Buying over the phone vs. online • International orders etc. • Pick a broker that fits your needs

6. Scottrade • $7 Trades • No inactivity fees • Basic functional interface • Branch offices • Excellent customer service • Used by many CCIG members • Three free trades for recommendations • Help with referrals, questions

7. Types of Orders • Market – brokers buys/sells for the current market price • Limit –an order to buy or sell a set number of shares at a specified price or better • A Limit Order guarantees price, but not an execution • Stop-Loss – similar to limit, buy or sell at a certain price • Limit downside of short sell • Protect existing profits • Stop Limit – combines stop order (1) w/ limit order (2) • Control when the trade takes place • Trailing Stop – parameter w/ trailing feature

8. Placing a Trade • Entry Form

9. Account Types • Brokerage • Basic Buying and Selling Stocks, Funds, etc. • Margin, Options • Roth IRA • Post-Tax Retirement Account • Pay Tax Now Instead of Later • Contribute up to $5,000 of Earned Income • IRA • Pre-Tax Retirement Account • Pay Tax on Withdrawal (during retirement)

10. Investing in Funds

11. Types of Funds • Money Market Fund • Equity Fund • Bond Fund • Balanced Fund • Income Fund: NSBAX • Growth Fund • Value Fund • Indexed Fund • Emerging Market Fund

12. What to Look For in Actively Managed Funds • Expense Ratio • Tax Efficiency (Redistribution of 90%) • Investing Goals and Style • Management Incentives and Interests • Ownership • Fee Structure • Historical Returns • But be careful because historical returns often aren’t indicative of future returns!

13. Examples of Value-Oriented Funds • Artisan Midcap Value (ARTQX) • Longleaf Partners (LLPFX) • Heartland Value (HRTVX) • -market cap <1.5 bill • Periods of underperformance when value is out of favor • Relying on the decisions of management • In the U.S., starting to fall out of favor…

14. Exchange Traded Funds (ETFs) • If the ETF tracks an index, you don’t have to worry about tax efficiency, evaluating a manager, but do pay attention to expenses! • Low cost, tax efficient, stock-like • “A security that tracks an index, a commodity, or a basket of stocks like an index fund, but trades like a stock on an exchange.” • Pay same commission as a regular trade ($7 at Scottrade, remember to use limit orders) • Buy and sell anytime markets are open (liquidity)

15. Keeping ETFs Fairly Priced: Arbitrage • ETFs have an underlying net asset value (NAV) • Depending on supply and demand, the price of an ETF may deviate from its NAV • When trading at a discount, authorized arbitragers can buy ETF shares and exchange those shares for the underlying securities and sell those securities, or vise-versa if the ETF is trading at a premium • This keeps the price of the ETF close to its NAV, and thus fairly valued

16. Examples of ETFs • Sector-Specific • Currency-specific • Commodity-specific • Country-Specific: EWZ, EWY, FXI • Index Funds: VTI, VEU, VNQ, VWO, IVV, SPY, SPDR

17. Simple Indexed ETF Portfolio • 60% VTI – Vanguard Total Stock Market Index, ER 0.07% • 40% VEU – Vanguard FTSE All World Ex-US Index, ER 0.25% • Add bonds later • Weighted ER of 0.14% • Holds Over 5,000 Stocks

18. Index Mutual Funds • Higher minimums • Better for small, frequent purchases (DCA) • Avoid trading costs by buying directly • Only priced and traded at the close of the day

19. Available via OSU libraries and ccig.osu.edu: http://proxy.lib.ohio-state.edu/login?url=http://library.morningstar.com

20. Morningstar • Aggregates Fund Data • Expenses • Historical Returns • After-Tax Returns • Holdings • Also Rating System and Analyst Reports • Portfolio X-Ray • Displays data for a portfolio of funds • Sometimes more data than you really need…

21. Some Related Reading • A Random Walk Down Wall Street by Burton Malkiel • Common Sense on Mutual Funds by Jack Bogle • The Bogleheads’ Guide to Investing • Morningstar’s Guide to Mutual Funds

22. Summary • Do some research, read one or two books and you will be set • THING TO REMEMBER: the fund is only as good as the manager • Weigh the pros and cons of investing in active versus passive funds • CCIG generally is not focused on investing in funds, but we can point you in the right direction • Remember that enterprising investors may still choose ETFs for easy and inexpensive exposure to specific industries, countries, etc

23. Questions?

24. Club Portfolio

25. Goals • Show by realistic example how to choose investments • Provide a sample portfolio of value investments for a college-aged investor • Learn about different stocks and companies and what makes them attractive investment opportunities • Encourage discussion and debate • Maintain records of the portfolio to learn from mistakes and successes

26. Parameters • Start with $5,000 cash • Trades cost $7 (Scottrade pricing) • Placing a trade requires that a majority of present and voting members approve the transaction • Provide rationale and analysis (as well as continuing discussion) for each investment on the appropriate forum page

27. Analysis • Reason for Buying • Selling Strategy / Expected Duration • Reason for Selling • Analysis of our performance

28. Individual Portfolio • KaChing • Numerous online sites • Sign up! And Play!

29. For Next Week • Accounting • Financial Statements • Basic Valuation • Stocks: • Darling International (DAR)

30. ccig.osu.edu October, 2009