Opinions on mutual fund prices [Archive] - Glock Talk

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ClydeG19
05-26-2005, 07:45
I'm still rather new to the whole mutual fund/401k/IRA scene, so I really don't know how these trends go. I tend to believe (no real evidence to support it) that I should avoid higher priced growth funds b/c the price can't go up much more. I suppose an income fund would be ok, but I don't see too many stocks and funds with triple digit selling prices.

What do you guys think?

DBradD
05-27-2005, 01:10
I don't know what you mean by "higher priced growth funds." I think that you're thinking about this incorrectly.

You should go out and buy a book on the subject of personal investing. There are lots of these geared toward the average beginner. It's really not too difficult if you keep it simple, and there's no reason to get fancy.

In a real quick nutshell (go out and buy a book!):

1. Don't buy any fund that's been around less than 5 years, preferably 10.

2. Look at the 5,10 etc year average returns to get an idea of how the fund has done over the long haul. You're looking for long-term performance and don't go chasing last year's returns. It doesn't matter if the fund did exceptionally well last year. Think long term track record.

3. Go to morningstar.com and look up your prospective funds. It ain't perfect, but they have some simple rating systems.

4. Do not try to time the market. Select your funds. Put dough in there. Forget about it, except for some very minimal monitoring. No matter what fund you choose, it will go up and down frequently. Taking your money out of the fund during a down time is equivalent to buying high and selling low. It's tempting to watch them closely, but most of us don't have the emotional stability to not lose sleep when our $150k from a few days ago is now $140k. It's better to not look.

5. I stick with no-load, low expense ratio funds such as the ones offered by Vanguard, T. Rowe Price, Tweedy Browne, etc. I don't know for sure that this is the best thing to do, but it seems to work and is popular with many, many folks.

6. If you're young and therefore have a long time window, then I recommend you skip money market (except for short-term savings and emergency funds) and bond funds. Not everybody agrees with this, but I don't see the point in putting money anywhere except stock mutual funds, for young people. For older people, it makes more sense to keep a lot of dough outside of stock funds.

7. A really good way to get started, without doing any research (you'll have time for that as you grow your money to a big enough pot to worry about...) is to put your money into a S&P500 Index Fund or Total Market Index Fund. These funds do nothing more than attempt to emulate the performance of the stated index. One could go an entire lifetime, investing in nothing but a single Total Market Index Fund. Would it be optimal? Probably not. Would it be simple and get results frighteningly close to the more complex portfolios? Absolutely. When searching for index funds, low expense ratios are everything, and no loads. Vanguard can't be beat for these, to my knowledge anyway.

8. Of course, stick with your 401k, roth ira, etc first because of taxes. Unless you're rich, you will have a hard time coming up with more investment dough than this anyway.

I hope this helps.
DBD

modgun
05-28-2005, 18:12
Start with index funds and get some familiarity in the market first.

ClydeG19
05-30-2005, 06:14
Maybe I should rephrase the question. I'm beyond the point of the newbie guides, but I'm trying to justify picking between a fund that has a $75 buying price and a fund with a $35 buying price, all performance indicators and ratings being roughly equal. They are both domestic equity growth funds with broad investment goals rather then sector funds. Does the selling price give anyone a reason to choose one over another? I would think I should go for the lower priced fund b/c there is a lot more room for growth. Although the price could theoretically go up to infinity, a higher buying price scares some investors away, so the pool of money to invest does not grow as quickly as the money of the fund with the smaller buying price. Anyone care to comment?

manboy
06-08-2005, 13:35
Sure, I'll comment. You seem to have already done some research and understand how things work. That being said, go with the lower one, because it obviously suits your investment strategy and thinking better. For my part, I would go with the lower one, you will get more units for the money you are using, and the potential for growth is probably higher over the long term. Maybe.


I find it mind-numbing how banks, insurance companies, investment companies and so on, can post huge quarterly earnings, but have a tough time growing your money at the same rate.....lol

Big Bird
06-08-2005, 17:33
Price is a ridiculous basis to evaluate mutual funds...

Would you be happier with a fund that charged .5% management fee and generated a 7% return or a fund that charged 1.5% management fee and averaged 12%? Case closed...

Price is only a consideration in the absence of value.(cliche...yes but true)

Price, therefore, is WAY down on the things I consider when it comes to making an investment selection. I'm not saying its not important...but its not a primary consideration.

Certain asset classes like small caps and foreign stocks are by their nature more expensive to trade in than say large cap growth stocks... Almost certainly funds in these asset classes "cost more" than other funds... Again, price isn't the primary driver behind selecting these funds.

To use an analogy...when it comes to buying ANYTHING in your life...home, car, clothes, you name it....RARELY is price THE driving factor behind your selection. You can always buy a cheaper car to get you from A-B, You can always live in a smaller less expensive house in a poorer neighborhood... Just be aware that not all cheap investments are necessarily good investments.

You also should look at other asset classes. Growth funds have significantly underperformed value, mid-cap and small-cap fund over the last 7 years... The S&P has been completely flat the last 5 years... Nobody really knows what the future holds but the whole point about asset allocation is that by diversifying your investement over several asset classes you will reduce your volatility and risk and also increase your return.

If you want to read an excellent layman's book on asset allocation and modern portfolio theory I highly recommend "The Prudent Investor's Guide to Beating the Market" by John Bowen.

Big Bird
06-08-2005, 17:57
I also just re-read your post and I think what you are asking about is share price? If so it has virtully no affect on mutual fund performance because unlike stocks, mutual funds can be purchased in fractional shares. The only reason stock companies split their shares once the price rises to a certain point is they believe it has a psychoological affect on the market...shares of Berkshire Hathaway notwithstanding...

manboy
06-08-2005, 18:00
As far as price is concerned, I only meant that if he figures that they are roughly equal in all areas, why not get more units for the money? I definitely wouldn't use that as the almighty decider in every area. It's tough to try to help without looking at the exact same info as Clyde is.

Big Bird
06-08-2005, 20:00
Manboy,
The share value of a mutual fund is determined by the value of the underlying assets (stocks) owned by the fund. The share value of the fund itself has no affect on the potential growth of the fund...only the stocks the fund owns can affect that growth or loss.
Increasing the supply of money invested in the fund can have both positive and negative effects on the fund (some funds get too big and find it impossible to effectively trade the money and take investment positions in the market consistent with the fund's investment goals. I guess a very clear way of saying this is there is no intrinsic value associated with a mutual fund's share price.

manboy
06-08-2005, 22:40
o.k. you sold me. let's do business.

ClydeG19
06-09-2005, 07:54
Ok, it seems I was operating on the assumption that the buying/selling price of a share of a mutual fund needed to go up to make money off of the fund.

Big Bird
06-09-2005, 17:45
Clyde, that is a good assumption. But its current value has no affect on its future value... The share value in a mutual fund is simply a pro-rata value of all the underlying stocks in the mutual fund portfolio.

If the fund owns stocks valued at $2 million dollars and it has 1 million shares outstanding the share value is $2/share.
If the stock goes up 100% and the portfolio is now worth $4 million your shares will go to $4/Share. If more people invest in the fund the fund manager has to invest that money and buy more stocks which increases the size of the portfolio under management but it also increases the number of shares outstanding...so attracting more money does nothing to affect the price of the fund...only the gain or loss of the stocks held by the fund will affect the share price.

mhill
06-16-2005, 10:11
Originally posted by ClydeG19
Ok, it seems I was operating on the assumption that the buying/selling price of a share of a mutual fund needed to go up to make money off of the fund.

The buying/selling price of the fund has no bearing on it's performance or value. Find another reason to pick one fund over the other.

I'll give you an example. Say I was buying 50% of a company.

Company A is worth 1 million dollard and has 10 shares so I would need to buy 5 shares of the company for 500K.

Company B is worth 1 million dollars and has 100 shares so I would need to buy 50 shares of the company for 500K.

Which company is more likely to succeed?

The answer is neither. I need to look at other factors and not the share price.

mhill

DBradD
06-22-2005, 22:23
Originally posted by modgun
Start with index funds and get some familiarity in the market first.

+47 on this one, although I think it's moot considering some of the later posts.

I think I'm going to use my life as an experiment and only use the total stock market index and see how I do....

On the real question: I had no clue that the price mattered, so I guess you're ahead of me.

bunkerbuster
07-01-2005, 22:17
agree with all the answers listed above. However, mutual funds have so much fees, and fr/b loads. I would rather get into safer stock with online trading firm.

KNEESINTHEBREEZ
10-26-2008, 12:22
agree with all the answers listed above. However, mutual funds have so much fees, and fr/b loads. I would rather get into safer stock with online trading firm.

That statement is filled with incorrect generalizations. First of all, not all mutual funds have loads. In fact, in the vast majority of cases it is recommended to select a mutual fund with NO load. Also, you will typically pay way more in fees/commissions with an online trading place than you would with mutual funds (no loads). I won't even go into the risk that's involved with selecting individual stocks as compared with a fund. And finally, there are plenty of excellent funds out there that have low expenses, particularly index funds.