Nate's Step by Step Guide To Investing in Mutual Funds (Read: Roth IRA - The Only Type of Investment You Should Be Doing)
(from a guy who doesn't know a thing about mutual funds)

1. Why am i writing this? cuz it's thanksgiving eve '99 and i can't sleep ;-D heck, as a friend i want to help my friends. trust me, i haven't regretted doing this. and you won't also.


2. Why mutual funds, you say? hey, most people i know are my age. and if you're reading this, most likely you'll fall into my age category, give or take 10 years. and like me, most of you probably think of things long-term, NO? well, put it this way. ask yourself: do you want to retire comfortably 20-30 yrs from now? now notice i said retire comfortably, not retire rich. well, where else can you put tax-deferred money where you can pull it out later and don't get taxed a single penny from your gains? A ROTH IRA.


No, you can't get BETTER funds putting your moola in a cd, those'll give you what...a measly 3-4% a yr? a savings acct? HA! you'll be lucky if you even get 1% return. a money-market? nope. a bond? no again. investing in a stock? those are very volatile. your portfolio could come crashing down in one day. with a mutual fund at least it's diversified. that's the key to it all: diversification. it's very unlikely that if all of the shares in a fund will go bad on any one day. look, i'm one of those people that missed the great bull run (stock speak) in the last ten years. had i know this like back in 1990 or had any interest in it, i woulda started. cripes, in 1990 i was still in high school! oh well, better late than never.

3. Where do you start? well, there are a couple of sites you visit. i strongly recommend going to www.fool.com, www.money.com, www.morningstar.com and best of all my favorite...





note: i do encourage you to research first and do your own investing instead of going to a broker or an agent. why pay extra money to someone who doesn't care about what you're investing? (unless if you have a certified financial planner friend whom you trust - most of these are fee-only planner) you can do as good a job if not better, doing your own investing. but it takes time and you do have to go thru some trial and error along the way.


4. Why e-trade? to put it simply. it's the best place to invest online. don't tell me you haven't heard that phrase before. :P it's easy and free to open up a Roth IRA. all it takes is a minimum of $500 to get going. i don't know of any other places that charges that bare minimum. other places i've visited normally will have a min. of $1K, like schwab. plus, e-trade's got like more than 4,000 or so funds. a lot of it are no-load, no transaction-fee funds (more on this later).


5. What kind of mutual funds should you invest in? well, i'll tell you straight out, when you do your research, you should go to either finance.yahoo.com or www.netcenter.com and pop up a fund's ticker symbol (5 letters in caps, i.e.: JAGTX) and click on its profile. there you want to find out if it has any load or not. if it has ANY kind of load, front-end or back-end, i have three words: FORGET ABOUT IT. trust me, you don't want those. you only want no-load funds and no-transaction fee funds. e-trade's a good place b/c it has many of these funds. other places even charge you like a $10 or $20 maintenance fee for a year. now, why should you pay a maintenance fee? DOH! warning: washington mutual funds charge front-end and back-end loads! don't get these! (my bank is WaMu though)


Then you want to find out its total expense ratio. normally, you'd want a figure that's less than 1%. what that means is that say, if your fund's expense ratio is 2%, and your fund has a return of 20% for the past year, you don't get 20%. no, sir. you get 18%. 20% - 2% = 18% (math was my favorite subject). so, you want to focus on the funds that have teeny tiny expense ratios. the best ones are: index funds.


What are index funds? these are funds that track the S&P 500 and according to facts, not even 10% of all funds in the last 5 years have matched the return of the S&P 500. in fact one index fund, VFINX, has an exp ratio of less that .20%. that's less than one percent! now, does this mean all the funds i own are low exp ratio funds? no. but you fall down and learn along the way. you need to take a step back to move two steps forward, you know. there.


Next, you want a fund that has veeeeeery low turnover ratio. what is turnover ratio? it's when a fund trades shares of companies it invests in. normally a fund would have on average 100 funds. if a fund trades like everyday like crazy, expect a very high turnover. now, what this does is it'll pay cap gain taxes at the end of the year, and you know who'll pay for it? yep, YOU.


Once again, the funds that have extremely low turnover ratios are index funds. because they just stick to the 500 companies in the S&P 500. maybe their turnover ratio is 4% or something for a year. now that's good. a lot of these aggresive growth funds are in the hundres, like 150% and upwards. whoo wee that's a mouthful.


Let's see what else i need to cover in terms of what kind of funds...before i go on, i'm not a financial planner, i'm only a friend who also just started investing and only giving FREE advice from what little things i've learned in the past half year or so. i am in no way liable if you do read this and do your investing and not be satisfied. you do have the freedom of not adhering to this article.


6. Past performace is no darn indication of future results. heh? come again? nope, that wasn't a typo. that's very true. a fund that skyrocketed last year can't be counted on to doing well this year or the next. that's misleading. even if you see funds that have 5 stars on the morningstar system don't mean they are great funds. even some of morningstar's people say that's a misconception to pick a fund just b/c it has 4 or 5 stars.


7. There are great funds out there. I will mention a few- and only the ones on e-trade. hey, i practice what i preach. i won't share if i don't do it myself. e-trade's the best! some index funds that you might want to consider are: VFINX, the flagship vanguard index. you can't go wrong on this fund. one catch though, it has a one time $24.95 transaction fee. but that's it, no more fees. so if you want to invest in this fund, do it with like $2K. then it'll be worth it. two other index funds i recommend are BTIEX and SVSPX. now these don't have transaction fees.


8. Asset allocation. what does this mean? well, it means how do you want to spread out your allocations. even though a mutual fund in of itself is very diversified, it's good to have a few funds. but just a few fund, ok? and by a few i'd say no more than the fingers of one of your hand. 5. don't be a loony and have like 20+ funds. you can't and won't have time to look after these funds. start out with one maybe two, and gradually go to five. allocation. there's that word again. ok, you don't want to put all your eggs in one basket. if you have three funds, you don't want all of them to be growth funds. you will learn later on what these growth and value and index funds mean when you go to these sites.


What you want is a good mix. right now, if you're my age, you can afford to be a bit risky. but you have to look in the mirror and ask yourself, are you an aggressive or passive investor? a lot of young people under 30 tend to be aggressive b/c in essence, there's still time to make up for your losses (if there are any) and catch up later on. i will share you my own allocation, and this is just my own personal example. 5% in medium cap growth, 15% in small cap growth, 20% in large company growth, 25% in international small cap growth, and 35% in the S&P 500 index fund.


People will tell you to go for growth and that's ok, just remember, it's safe to put some of it in that index. maybe even up to half of your portfolio. now, in the past year or so, international funds have gone crazy, and i THINK it'll stay that way for a while. small caps (funds that invest in small companies that have revenues of like less that %500 million) have also been doing good recently. i heard that value funds are gonna make a comeback next year. you never know. and of course, high tech and internet funds, you just can't go wrong there right now. yes, they're volatile but they also give awesome returns.


9.Why a Roth IRA? and what is it? well, it was founded in january '97 and it's for any single person making a max of $95K/yr or a married couple making a combined $150K/yr to put in $2K in a fiscal year (april 16 of the current year to april 15 the following year), or in the case of a couple, $4K max and have it tax-deferred for the life of the Roth. if you're single like me and make more than $95K (not like me), then you're not eligible.


You will get taxed on your contributions just like your income tax, but the gains in your Roth will compound tax-deferred (read: not taxed at all), and after 5 years, you can pull it out for buying a house or something. but what's the point of saving and then taking it out after 5 yrs, right? it blows the point. and there is no age limit when you HAVE to take money out of it. you can keep on putting money in until you're sniffing dirt in your coffin, hehehe... (no i'm not kidding). unlike a traditional ira where you HAVE to start taking money out when you're 59 1/2. i won't even go into traditional ira. no point.


10. Do you even need life insurance? i got a pretty plain vanilla answer from one of my friends when we used to talk about stuff on the old treadmill. (he shall remain nameless) he said that if you get the free term life or group life insurance from the place you work at, then that's all you need. i, myself, don't get much squat from whatever life insurance i get at work, but it WILL cover most if not all of my funeral costs, which includes burial lot and coffin hehehee...God forbid. other than that, why on earth would a single person under 30, wait...i don't care how old you are if you're still single you don't need no friggin life insurance. God knows you're worthless and of no value. unless you're a billionaire tycoon, take some steps in safe guarding your assets. not until you get married and have kids, then you go ahead and get that life insurace. the premiums are a ripoff anyway. bah humbug


more later...if you've got any criticism, inputs, or questions regarding opening up a Roth IRA or about mutual funds, or would just like to trade opinion, my mind's open.