Questions and Responses

What's a good fund alternative for a teenager with a small bank account earning minimal interest?

Where can I learn about a "lost" mutual fund?

How can a couple in their 70's shelter themselves from taxes?

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(note: due to the time-sensitivity of some financial questions, earlier volumes of our Q&A have been removed)

What's a good fund alternative for a teenager with a small bank account with earning minimal interest?

from J.

Q: I am 14 years old and am upset about my banking situation. I currently have about $2000 and my interest rate is 1.01%. I was wondering if a mutual fund would be good for me. If yes, which one? If not, what do you think would be a good idea for me to get the most out of my money?

A: (Frank)  I don't blame you for being upset. Banks are notoriously stingy with their returns on short term deposits. They borrow from their depositors at a very low rate, and charge their borrowers a much higher rate.

You might find that you can pick up some additional return without substantial additional risk by moving your account to a money market fund. 

Or, if you are willing to tie up your funds for a longer period, check out CD rates. As always, shop around for both CD and Money Market rates. There are large variations between rates, and the rates change almost every day.

What's a good investment for a soon-to-be college graduate?

from Jason

Q: I am a 21 year old senior in college. I was interested in investing. I already purchased shares of Vanguards 500 index fund. I was told by some of my friends and colleagues to invest in a Roth IRA.  I would like to know what kind of Roth should I invest in and what other Mutuals should I look into?

I inquired about stocks but was told by my financial advisor that I shouldn't invest in stocks because I would get killed on broker's fees. Also I was told to only invest in no load funds. Why is that?

A: (Frank)  If you have earned income, then you can consider a regular or Roth IRA. And, it's a great idea for you to start early. The value of time and compounding earnings is enormous.

IRA investing is a long term commitment. Having given you large tax advantages, the government doesn't want you to tap into the funds until you are ready to retire. So, with certain exceptions (death, disability, first time home purchase, etc.) funds withdrawn before age 59 1/2 are subject to tax penalties.

Given the long term nature of IRA investing, you may find that it is appropriate to have a rather aggressive investment policy After all, fluctuations in value are not a major concern if you don't expect to use the funds for many years. All other things being equal, you should be comfortable with a "risky" portfolio. That might include small company stocks, value stocks, foreign, and emerging market stocks. Since you already have the Vanguard S&P 500 index, why not put your IRA into one of their other excellent index funds in these categories?

I certainly agree that no load mutual funds are the best way to go. Why pay a huge commission for a fund that is unlikely to do any better than one without a commission. It's like running a 100 yard dash from six yards behind the start line. You might win, but you certainly have made it a lot tougher. Fees and expenses are important to long term results. There is a direct relationship between high costs and low returns. 

Buying individual stocks will most likely cost many times as much in commissions as a fund. And you are unlikely to get sufficient diversification in your portfolio. Inadequate diversification introduces unnecessary risk into your portfolio without increasing return.

You are on the right track, and it sounds like you are being given good advice. Good luck.

Where can I learn about a "lost" mutual fund?

from James

Q: I have lost contact with the company handling my mutual fund. I am in the Air Force and had to fulfill a series of assignments spanning years before returning to the states. I believe the original company merged or was bought by another company. How can I find where my fund is at? My quarterly statement papers were lost in storage so I don't really have a starting point to look. 

Is there a group or company that deals in relocating lost funds? Any help would be greatly appreciated.

A: (Frank)  First, thanks for serving in the US Air Force. We all owe you. 

Why not post the name and approximate time you bought the fund on the Mutual Funds Interactive main newsgroup (www.brill.com/wwwboard)? With all the participants there it's very unlikely that someone won't know what happened to your fund. I'm always amazed at how much useful information is available from that group.

from Louis

Q: I am 78, my wife is 72. I have an IRA account and my wife has a taxable account.

Would it make sense for each of us to shelter our taxable monies in a variable annuity instead of muni funds?

Our monies are essentially equally divided for estate purposes and the income from our accounts plus Social Security yields an adequate income.

A: (Barry)  Generally I am opposed to variable annuities except in very unusual situations. If your purpose is to shelter the income generated in your taxable accounts, I feel there are better and less expensive opportunities. 

Munis and/or muni funds are only one of several investments. If all you're looking for is a stream of tax free income, then the munis are an inexpensive way to invest. You should also look at 'tax efficient' mutual funds and unit trusts which may provide an opportunity for greater growth and little or no income tax until sold and then taxed at capital gains rates rather than regular income tax rates.

Unfortunately, with an annuity, someone will eventually pay the tax on the deferred build up at regular income tax rates. Unless you are planning to 'annuitize' the annuity, then stay away. They are very expensive since they provide many benefits that most people never need or use, but which they pay for nevertheless (death benefits, investment expenses, commissions, etc). A good rule for investing would be to pay for only what you need and not for things you'll not likely use or ever need.

Important Disclaimer

Investing in equities involves a serious principal risk, and no assurance can be given that the techniques described here will be successful. Returns vary and you may have a gain or loss when you sell your shares. Past performance is no guarantee of future results. Index returns shown are historical and include the change in share price, reinvestment of dividends, and capital gains. Indexes are unmanaged and do not reflect the impact of transaction costs. Transaction costs would have reduced the total returns.

International investments, especially those in emerging markets, entail greater risks (as well as greater potential rewards) than U.S. investing. These risks include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less-established markets and economies.

Lastly, the questions and responses set forth here are for general informational purposes only and are not intended to substitute for performing your own independent research or contacting your financial or legal professional before making any investment decisions. We make no guarantees as to the performance of any investment strategy you choose and are not responsible for any losses you might incur.