What is a Mutual Fund? [+Is Now the Right Time to Invest?]







Christina K. (Host)

Hello, everyone. Welcome! We are glad to have our Credit Union members joining us today for our mutual funds webinar. My name is Christina and I'm the financial wellness program manager here at the credit union, and my special guest today is Ryan Graham. Ryan is a financial advisor and has been in the industry for over 20 years! His favorite part of the job is helping people understand what's available to them, and just knowing that it's not a cookie-cutter, one-size-fits-all option for your investments and retirement. 

Securities offered through Securities America, Inc., Member Financial Industry Regulatory Authority and Securities Investor Protection Corporation (FINRA/SIPC) Advisory services offered through PFG Advisors. Copper State Wealth Management Services, Copper State Credit Union, Securities America, and PFG Advisors are separate entities. Securities America and its representatives do not provide tax or legal advice.

Mutual funds are sold by prospectus only. Investors should consider objectives, risks, charges and expenses of the fund carefully before investing. The fund prospectus contains this and other important information. Investors should read the prospectus carefully before investing. For a copy of the prospectus contact your financial advisor.


What is the 20 year annualized return by the average self-directed investor? (or average percentage yearly that an investor earns on their portfolio, doing it by themselves)?
a. -1.9%
b. 2.9%
c. 4.9%
d. 9.2%

JPMorgan Average Investor (1000 x 800)

Ryan G. (Financial Advisor)

It's a 2.9% return on investment. So, we looked back over the last 20 years, J.P. Morgan puts out a report in their guide to the markets every year, and it looks at all the different categories. One of the categories was that the average investor earned 2.9% on average. This is definitely beating bank accounts, which is wonderful. However, if they would've invested in the broader stock market, you would have averaged about 7.5%.

What is a Mutual Fund?

Christina K. (Host)

What is a mutual fund? A few different terms are thrown around a lot in the investment world and it can be difficult trying to understand the differences. 

Ryan G. (Financial Advisor)

Yeah, great question. So basically, it is a product that people can invest in with other people and institutions. Mutual funds have stocks and bonds inside of the account. They can also have what's called commodities, which can be alternative assets. So, they help navigate the crazy world that we live in and can really help give diversity to our members that have smaller dollar amounts and still want exposure to different companies. There is a management team that actually picks the individual holdings inside of the account. They build out the fund to the mandate of whatever they're trying to accomplish.

Most of us are more of moderate allocation type people. We don't want the full swing of the markets, because if things go down, it really hurts to lose money. So, a moderate mutual fund investor is going to have a mix of about 60% in stocks and about 40% in bonds. So, when the mutual fund investment takes a moderate allocation, they're going to have a good percentage in U.S. stock funds. They're going to have some international stock funds inside of the account, and then they're going to have a variety of different types of bonds inside of it as well.


What are ETFs?

Christina K. (Host)

Okay, thank you. Now, on the other hand, can you tell me a little bit about ETFs? Mutual Funds and ETFs are commonly discussed together.


Ryan G. (Financial Advisor)

It's an Exchange Traded Fund. If you look, there's lots of different indexes out there. There's the Dow Jones, the S&P 500, and the Barclays Bond Index. So, there's companies out there that can basically build out an ETF portfolio for you that mirrors the index. The advantage is that they're very inexpensive to get into and manage, because there is no managing them. With the S&P 500, you're going to have all 500 companies inside of the account, where a mutual fund investment might only have 300 of those companies because maybe the other 200 are struggling. With an ETF, you have to purchase the whole entire thing. So, when you're investing in the Dow or the S&P, basically you don't have a choice on what companies you're working with.

The idea of a mutual fund investment is that you pay a little bit more in fees, but you really get added value for what you're paying. And basically, we're allowing these fund managers to go out to these 500 companies and really pick and choose what they're going to be investing in. Mutual funds are actively managed by a team who buys and sells inside of the account. They can change quite a bit. It’s very rare that an index changes what's inside of it. You'll hear on the news sometimes, "oh, a company was added to the S&P 500," or, "a company was dropped off the S&P 500." But it's not super often that big changes are made. With a mutual fund, it can be on any given time based on what's happening in the market.


What is the Goal of a Mutual Fund?


Christina K. (Host)

What would be the overall goal of a mutual fund? Why were they created? What's the goal there? It sounds like it has a lot of similarities to ETFs.


Ryan G. (Financial Advisor)

We're always trying to do better than the index. So, if markets are going down, the mutual funds want to go down less than what it's comparing itself to.
If markets are going up, we would like to go up higher than what the index is doing, because we want to cover the extra fees. Both are very easy to get in and out of, so that really helps. Then, mutual funds really help give another layer of diversification. A lot of the indexes out there, you can't have a combination of stocks, bonds, and international; where mutual funds actually give you all of that exposure in potentially one holding.


Benefits of Mutual Funds


Christina K. (Host)

So, you've talked a little bit about diversification already. Can you go into some of these other benefits?


Ryan G. (Financial Advisor)

So, not only can a management team do all of the buying and selling, but typically they'll live around the world. This helps them get a firsthand view of what's happening in different parts of the economy. We're here in Arizona. We're seeing what's happening on the news, but we don't have the time to be all over the world to figure out what's going on. So, it's nice that we have people that can be all around the world giving us good opinions on what may happen. For example, there might be times where, like when COVID hit, we needed to focus more on the U.S. instead of international markets. So, those managers can easily  make necessary changes for us. All we're going to do is talk to our members about what managers are offering and taking action on.


Another benefit is when you look at a fund manager that made adjustments, they might have sold travel stocks during the pandemic when everything was shut down. They would've bought things like Zoom and cardboard. So, it's going to help be more profitable. Where the index was down 35%, a lot of the mutual funds really held together because they were able to make quick decisions. One unique aspect is when you're buying mutual funds, you can buy partial shares. So, say you have $555, we can fully invest that $555 in a mutual fund.


Christina K. (Host)

So, how is that different? What would my $555 get me in an index? What's the difference there?


Ryan G. (Financial Advisor)

If an index is at $10 a share to buy into that ETF, you're only going to be able to have $550 put to work. That other $5 isn't going to do anything for you. So, that's what that maximization item is, because you can buy partial shares of the mutual funds. Both accounts will give you interest and dividends reinvested into the account. So as bonds pay interest and as stocks pay dividends, all that money is going to go back into growing the account. So, when we experience days in the markets where things were down, if we were buying more inside of the account with those dividends and interest from the end of the year, then we're going to be able to buy things on sale and really help grow the number of shares faster. Then, over time, the more shares you have, as the markets get better, you're going to see your money grow faster. It's going to compound.


Drawbacks of Mutual Funds


Christina K. (Host)

All right. So, let's talk about the drawbacks. I think it's really one major thing that you always bring up because we want to be transparent.


Ryan G. (Financial Advisor)

So, the drawback is fees. Index funds and ETFs are extremely inexpensive to get into because there is no management. You could only buy one share of the index or the ETF, and that's all you have to buy. So, you could spend $10 and essentially get invested in the markets. Where a mutual fund is usually going to have a certain minimum on the account that's going to be anywhere from $500-$1000, typically. I think that's the biggest drawback. Then, because we have to pay these fund managers to live all around the world, there's going to be a little bit more fees on those mutual funds. I've always argued that fees are only an issue in absence of value, and I believe that these managers really add a lot of value to the account. When things are bad, they're going to lose less. And when things are good, they're going to do really well for you.



Types of Shares and Fees


Christina K. (Host)

I don't want to get too much into the weeds here, but can you explain the types of shares and the fee structure?


Ryan G. (Financial Advisor)

There are a few different types. We have what's called A shares, C shares, and institutional shares. So, A shares are going to have an upfront fee depending on how much you're investing. Usually the max is around 5.75%, and then they're going to be charged a moderate internal fee that you'll never really see. They're liquid accounts, so you can get in today and you can get money out next week and not have a penalty.

Whereas with a C share, there's no fee to get into the account, there's no fee to get out of the account, but they ask that you hold it for 12 months. If inside of those 12 months you close the account or you pull money out, there is a 1% penalty on the withdrawal amount that you take out, typically.


There's also institutional shares, which typically when you have a million dollars, you get to buy in for free and you have the lowest of all costs. These will be going for much higher dollar amounts. Then, when we use our advisory accounts which have a combination of mutual funds and those ETFs inside of it, those actually have institutional shares inside of them. So, really for our members here at Copper State, we can have a variety of different share classes in their portfolios to make sure that we're helping meet their goals.

Final Statements

Christina K. (Host)

What do you want our audience to remember out of all the things we've talked about today?

Ryan G. (Financial Advisor)

I think it's so key to stay diversified. I hear every day of people talking about Bitcoin, gold and silver, and stocks and bonds. Just really build out a well-rounded portfolio of a lot of different things and you'll end up winning at the end of the day. We don't want to just pick one stock, one bond, or one Bitcoin and focus on only that. There's a lot of risk to that. The whole thing we're trying to accomplish here is long-term growth.

At Copper State Wealth Management, we're not looking to take $1,000 and turn it into $1 million overnight. We want to take your wealth and continue to grow it over time so that we can help meet retirement money goals and purchasing goals. If you want to buy a house and you have five years before you need to do that, we can help you grow those assets in the short term.

And the nice thing is with having a membership at the Credit Union; myself, Anthony, and Tony, we're all here to have that meeting with our members and sit down and figure out how we can best support you. There's no obligation, there's no cost. Let’s just take a look at what your goals are and we'll go from there. Thank you for taking the time out of your day to learn a little bit about some of the different options that are available. If you have any questions at all, feel free to reach out to me at any time. I'm here to help.

For a quick look at 2022 tax brackets and deadlines to know, click here!

Questions & Answers

Q: If you are a beginner investor, would you recommend mutual fund investments versus micro-investing in large companies like Apple or Tesla?


A: Micro-investing is absolutely one way to do it. That can help you when you have a really small dollar amounts and you're just looking to buy bits and pieces over time. So, that can be one way that you grow your assets until the point of being able to buy into a mutual fund. The micro's a great way to start when you're putting pennies or dimes or a couple bucks here and there, but a mutual fund is a second step once you have the large sum. When we sit down with Arizonans, we want to make sure that we've got some money set aside in savings to cover any emergencies that occur. Make sure you've got a couple months of living expenses set aside and then we want to start looking at those investments. So, micro-investing is a great addition to making sure that we have balances in the savings to protect you. To learn more about how to invest, we offer another On Demand Webinar that is a complete beginner's guide to investing. 


Q: How long do you recommend keeping a mutual fund for?


A: It's based on your specific goals. For a minimum timeframe, it really depends on the share class you buy. Typically, the C shares, you have to hold for 12 months, so at least a year. However, if you're purchasing an A share, it's liquid on day one. But you are paying a fee to get into that. The more money you put into the account, you can get break points on the fees, to the point of where you might be able to get in without paying a fee. But then, that fund company is typically going to want you to hang onto those funds for at least a year. Really, if we look at the breakeven between A shares and C shares, it's going to land anywhere from 5-10 years. So, for someone that needs the money in three years, a C share is a great fit. For somebody that doesn't need the money for 10 years and wants to start with something very simple to read on a statement but is very diversified inside of the account and professionally managed, an A share mutual fund works really well for those situations.


Q: Why do I need an emergency fund? How much should I set aside?


A: Something that is very important in financial wellness is, of course, is making sure you've got a liquid emergency fund set up for yourself. You want to have cash for a certain amount of time, often a couple of months that could get you by on your living expenses. A lot of people recommend starting with one month of expenses, but try to work your way up to three or even six months’ worth and have that available in liquid funds for when things to come up. Then, once that's set aside, you can go into the investment world and not have to worry as much about pulling that out if something unexpected happens. It’s great that the Credit Union has better rates than your typical banks. I really encourage people, three months is really the minimum expectation to have set aside in savings. I met with a member the other day that we recommended they have closer to 12 months based on their specific situation. You really want to make sure that you've got enough and savings to cover a missed day of work that you weren't really expecting to have. 



Contact Copper State Wealth Management


Q: Do you predict mutual fund investments being an evergreen investment product? Is it going to be something that's consistent?


A: Mutual funds are here to stay. I think they're always evolving. There's been some talk of a balanced portfolio, a 60/40 maybe not doing well given where the bond interest rates are at. We can all see in our bank accounts, our interest rates are very low. They've been low for a long time. Because of that, there's a lot of concern that maybe these moderate and conservative mutual fund investments are not worth it to have certain things inside of the account. We are going to see interest rates increase soon, and we really want these bond managers to be active and to continue to manage the account. We might not make as much money as we did over the last 20 years in these modern accounts, but we're still going to most likely make more than what's in a checking or a savings account.


Q: What are some other investment options you would recommend beginner mutual fund investors to research?


A: There are a lot of different things out there. Everybody's talking about Bitcoin these days. So, that's something where you can go on to some of these online trading platforms. There's NFT funds which offer exposure to some of the newer companies that are going public. Obviously the ETFs are a great way to start. In addition, you can do the index, cryptocurrency, stocks, and ETFs. If we're later on in life over our mid 50's, there's different types of annuities that are available that can be ultra conservative, paying fixed rates. What I always recommend to people is that it doesn't matter the dollar amount—it’s important that you have a conversation with one of us. We can go over your specific goals and situation, and then we can help make a proper recommendation. Even if it's not with us, we want to help you get started and guide you in the right direction. At Copper State Credit Union, we have advisors at every branch. The conversation is free. You can determine your risk preferences, talk about IRA rollovers, retirement age, and all that fun stuff. Please take advantage of that.


Thank you so much for joining us everyone! We hope that this was helpful. Always check copperstatecu.org/events for updated information regarding live and on-demand webinars. Thank you!

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Securities offered through Securities America, Inc., Member Financial Industry Regulatory Authority and Securities Investor Protection Corporation (FINRA/SIPC) Advisory services offered through PFG Advisors. Copper State Wealth Management Services, Copper State Credit Union, Securities America, and PFG Advisors are separate entities. Securities America and its representatives do not provide tax or legal advice.

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This article is intended to be a general resource only and is not intended to be nor does it constitute legal advice. Any recommendations are based on opinion only. Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval.