Need Investment Advice: Mutual Fund

[TJN23]

Hello All,

I invested $1500 in a mutual fund in the summer of 2000 aimed toward long term growth. I haven't really touched it until these past couple months, pumping in $50 a month per advice from my dad.

The value over that time 2000 ---> early 2003 has pretty much decreased 50%

My question is: should I keep investing money into this fund (The Growth Fund of America @ www.americanfunds.com) even though it has been on a decline for a few years now? It's kinda frustrating to be putting money into something that's either not staying steady or not gaining, but I'm trying to stay disciplined.

TIA for any advice, ideas, comments, etc.

Tim

 

[viewton]

We have that fund as an option for 401k at my job...would definitely still keep putting money in, especially if you mean long term 5+ yrs...honestly, anytime you see it go down, that should make you happy because your $50 is buying that many more shares, imo.

Really depends on your definition of "long term" though.

 

[TJN23]

i understand your point completely, heck i dont wanna pull out of this mutual fund for at least 10 years, so in that case yea its good to know my $50 is buying more, but I'd just like to see it go up some day

well that makes me feel a little better, thanks

Tim

 

[alrocky]

AGTHX has a 5 star Morningstar rating. It unfortunately is a load fund. You should consider going to the forum at Morningstar.com and ask about it or check for any posts regarding it. Also check the ticker information that the site offers regarding AGTHX.

If this is your only investment, I hope it's in an IRA, generally speaking in a ROTH IRA. You can and should invest the maximum $3000 into your tax year 2003 IRA. I'd shy away from load funds and funds with high expense ratios. Yours has a load of 5.75% and an expense ratio of .75

 

[Hector13]

I have to disagree, I don't think you should ever be happy to see you fund go down in value.
That being said, I wouldn't sell out of your position, the fund looks like an okay investment (morningstar rates them 5 stars if you care about morningstar's rating). But I don't know if you want to keep pumping money into the same fund. It has had returns that are pretty similar to the SP500 over the past 3 years but has more than double the expense fee of an indexed fund, so you may want to consider using one of those instead.

Also, is this your only investment? If so, you should consider diversifying by buying perhaps a bond fund or an international equity fund (or perhaps a small or mid cap US fund as this one seems to be mostly large cap).

 

[Shantanu]

I'm taking a corporate finance class right now at a business school. The average return on mutual funds tends to be 3% lower than the market return. You could randomly pick stocks and get a better return off that you will from 90% of the mutual funds out there.

 

[FeathersMcGraw]

Originally posted by: TJN23

My question is: should I keep investing money into this fund (The Growth Fund of America @ www.americanfunds.com) even though it has been on a decline for a few years now? It's kinda frustrating to be putting money into something that's either not staying steady or not gaining, but I'm trying to stay disciplined.

If you're really investing for long-term growth, then stay the course. You opened the account in 2000 -- you haven't even held your shares long enough for any earnings (assuming that things turned around today) to be considered long-term capital gains. Disciplined investing means steady investment, regardless of market conditions. If you're targeting $50 a month, make sure you always put in $50 a month.

Real frustration is eating your 50% loss (and I'm guessing that you probably don't itemize your taxes, so that won't even provide any writeoff benefits for you) and then seeing a (potentially short-term) market recovery within the next year or so. If you truly think that the prospects for this investment are poor long-term, then your money will serve you better elsewhere. Otherwise, you're just being panicky.

If you're losing sleep at night over the state of your portfolio, you may be psychologically risk-averse and should consider less aggressive/volatile investments like municipal bonds, CDs, or money market funds. You won't get rich by any stretch of the imagination (if anything, you'll be keeping pace with inflation), but at least you won't keep thinking that you're losing money.

 

[Hector13]

Originally posted by: FeathersMcGraw
If you're really investing for long-term growth, then stay the course. You opened the account in 2000 -- you haven't even held your shares long enough for any earnings (assuming that things turned around today) to be considered long-term capital gains.

huh? doesn't long-term capital gains mean over 1 year? In any case, with a mutual fund the point is moot becuase it depends on turn-over of the fund's assets, not on your shares of the fund. In other words, you could hold on to those shares for 20 years and not see any "long term" gains if the fund is buying and selling like crazy.

Again, inesting for the long-term doesn't meen putting all your money into one company/fund. You might as well diversify into other funds/asset classes.

 

[FeathersMcGraw]

Originally posted by: Hector13

huh? doesn't long-term capital gains mean over 1 year? In any case, with a mutual fund the point is moot becuase it depends on turn-over of the fund's assets, not on your shares of the fund. In other words, you could hold on to those shares for 20 years and not see any "long term" gains if the fund is buying and selling like crazy.

My bad, I was thinking of long-term capital gains as the 5-year qualified capital gains. That'll teach people to take financial advice from people over Internet bulletin boards.

And you're right about year-to-year capital gains being taxed on the fund's holdings/activity, but I was referring to the treatment of sales of fund shares as a taxable capital gain/loss. Even if the fund's gains are entirely long-term, if you sell your shares within 12 months of the initial purchase, any profit from the sale due to appreciation will be treated as a short-term capital gain for income tax reporting purposes.

Again, inesting for the long-term doesn't meen putting all your money into one company/fund. You might as well diversify into other funds/asset classes.

This is also true, but my advice about staying the course and continuing to invest was primarily about maintaining an investment discipline. Asset diversification is also a good practice, but I think that people who don't put money into (all of) their investments on a regular basis will be tempted to use diversification as an excuse to market time ("I'll put my $50 into bonds this month because the bond market is going up").

 

[TJN23]

well while it's not my only investment, i dont have much else - just a Roth IRA (formerly Datek, which is now Ameritrade)

Since I'm not out of college yet I can only manage roughly $500/year (which i believe is the minimum) into the Roth IRA and 50$ (not every single month, although I should try) into the mutual fund AGTHX

if I have such little funds relative to what I will have when I get out into the working world, will diversification be worth my while now? i.e., it's hard enough to invest in what I have now let alone adding more stocks or other securities in order to diversify...

Tim

 

[numark]

Originally posted by: Shantanu
I'm taking a corporate finance class right now at a business school. The average return on mutual funds tends to be 3% lower than the market return. You could randomly pick stocks and get a better return off that you will from 90% of the mutual funds out there.

Maybe so, but you're also going to get eaten up by commissions. It's infinitely cheaper a lot of times to buy into mutual funds. You're also not going to be able to buy into 150 different companies like a mutual fund. What if one of the 10 random stocks you pick happens to be the next Enron? People get into mutual funds for the security and diversification, not necessarily stellar, top-level returns.

 

[Hector13]

Originally posted by: numark

Originally posted by: Shantanu
I'm taking a corporate finance class right now at a business school. The average return on mutual funds tends to be 3% lower than the market return. You could randomly pick stocks and get a better return off that you will from 90% of the mutual funds out there.

Maybe so, but you're also going to get eaten up by commissions. It's infinitely cheaper a lot of times to buy into mutual funds. You're also not going to be able to buy into 150 different companies like a mutual fund. What if one of the 10 random stocks you pick happens to be the next Enron? People get into mutual funds for the security and diversification, not necessarily stellar, top-level returns.

I don't think that is what Shantanu (or I) meant at all. Sure, it is expensive as hell to buy all 3000 stocks in the Russell 3000 and you are right that mutual funds offer a much cheaper way to get a basket of stocks. But there is usually no good reason to buy an actively managed mutual fund over an index fund.

So you could buy a S&P 500 mutual fund (or Russell 3, or any other big index) and get the easy diversification, outperform most active funds (I say most becuase I don't fully believe the 90% figure), and still pay lower fees (most index funds have fees near 20-30 bps vs. the 77 bps for the fund mentioned above).

 

[Shantanu]

85% of mutual funds don't beat the market return. If you want diversification, just buy Spider.

 

[alrocky]

Get a hold of <U>Mutual Funds for Dummies</U> by Eric Tyson. You should invest in your ROTH IRA before any other investment. If you made or expect to make at least $3000 this year, invest $3000 in your IRA. Invest as much money as you earned (up to $3k) into your IRA. If you made $3k but don't have $3k, consider borrowing it from your dad. I did so, and I think he was impressed that I was thinking long term for my future.

NOW is always the best time to invest. People who put off investing for later, often never find the right time to invest. As far as diversification goes, consider a no-load total-stock-market mutual fund. You could also consider a balanced fund instead.

I commend you for starting your investment planning while in college.

 

[Hector13]

Originally posted by: alrocky
Get a hold of Mutual Funds for Dummies by Eric Tyson. You should invest in your ROTH IRA before any other investment. If you made or expect to make at least $3000 this year, invest $3000 in your IRA. Invest as much money as you earned (up to $3k) into your IRA.

just to be clear, this is assuming (I hope), that you dont work somewhere where you have access to a 401K. If you do, you should always invest in your 401K first, then into any IRA.

 

[Zebo]

Buy Gold, think 1929.

BTW everyone in the not knows portfolio has decreased by 50% since 2000. Don't feel bad, but stop the bleeding.

 

[FeathersMcGraw]

Originally posted by: Hector13

just to be clear, this is assuming (I hope), that you dont work somewhere where you have access to a 401K. If you do, you should always invest in your 401K first, then into any IRA.

At the absolute minimum, invest as much as possible to get whatever match your company offers. Not taking advantage of matching funds is like throwing away money, even if there's a vesting period (unless you have reason to think you won't be with the company long enough to get those funds).

Originally posted by: Carbonyl

Buy Gold, think 1929.

I have no idea if you were being sarcastic or not, but gold is a sucker's bet. The only people who make money on gold are people who can time the market well, and most of the people who fall into the "I think I should be investing my money; what should I invest in?" category are not. If you put your money in gold long-term, expect to be able to buy about as much with your earnings in ten or twenty years as you can with your investment seed today.

 

[GasX]

Originally posted by: Shantanu
I'm taking a corporate finance class right now at a business school. The average return on mutual funds tends to be 3% lower than the market return. You could randomly pick stocks and get a better return off that you will from 90% of the mutual funds out there.

That is why ETFs, index funds and well researched individual stocks rule.

 

[Hector13]

Originally posted by: Mwilding

Originally posted by: Shantanu
I'm taking a corporate finance class right now at a business school. The average return on mutual funds tends to be 3% lower than the market return. You could randomly pick stocks and get a better return off that you will from 90% of the mutual funds out there.

That is why ETFs, index funds and well researched individual stocks rule.

I would still stay away from any "well researched" stock (unless, of course, you have some material inside info, but that would be illegal ).

No matter how well you think you can research a stock, you will never be able to beat those on the street who get paid to do this for a living. The fact that even they can suck so badly at stock picking should tell you something about your chances as a typical everyday guy.

 

[GasX]

Originally posted by: Hector13

Originally posted by: Mwilding

Originally posted by: Shantanu
I'm taking a corporate finance class right now at a business school. The average return on mutual funds tends to be 3% lower than the market return. You could randomly pick stocks and get a better return off that you will from 90% of the mutual funds out there.

That is why ETFs, index funds and well researched individual stocks rule.

I would still stay away from any "well researched" stock (unless, of course, you have some material inside info, but that would be illegal ).

No matter how well you think you can research a stock, you will never be able to beat those on the street who get paid to do this for a living. The fact that even they can suck so badly at stock picking should tell you something about your chances as a typical everyday guy.

You obviously don't know anything about Wall Street Analysts....

If you work in an industry, yoiu know a lot more about that industry than ANY analyst. If you know a company makes the best product at the best price in that industry, it can often make a great buy. As far as Mutual Fund managers are concerned, the only ones that do well are the ones managing small funds with customers that aren't liquidating assetss frequently - i.e. they can actually invest rather than trade to manage cash.

 

[Shantanu]

The market cap of a company is based on the present value of all expected future earnings (dividends).

The semi-strong theory of market efficiency, which holds that stock prices are based on all publically known information, and anyone trading on this information can't expect to obtain abnormal returns, holds up pretty well. As soon as any new information is released, prices adjust immediatly. You can never act on new info (with the expectation of improving your returns), because by the time your order reaches the trading pits the prices will already have adjusted. If you know of any Wall Street investment banking analysts who are making 50% returns on their investments, they're probably trading on inside information and will get caught sooner or later.

Technical analysis is a waste of time. Stock timings are a waste of time. Buy+hold is the only strategy that works. Just look at Warren Buffet. Smart investors can earn the same returns as the best day traders, and - unlike day traders - have enough free time to work another job.

That said though, I think tech stocks in general are ridiculously overpriced. They average 30+ P/E ratios. I just don't think that kind of profit growth will happen in that sector. More likely, as the industry matures profits will be depressed and shareholder value will decline. Also, value stocks provide better return than growth stocks. Small-cap companies provide better returns than big-cap companies.

If I had a couple of grand right now, there are so many good investments I could be making.

 

[Hector13]

Originally posted by: Mwilding
You obviously don't know anything about Wall Street Analysts....

that's odd... considering I am an analyst... on wall st...

If you work in an industry, yoiu know a lot more about that industry than ANY analyst. If you know a company makes the best product at the best price in that industry, it can often make a great buy. As far as Mutual Fund managers are concerned, the only ones that do well are the ones managing small funds with customers that aren't liquidating assetss frequently - i.e. they can actually invest rather than trade to manage cash.

you'd be surprised how well some analysts know their industries. Of course, I am talking about buy-side analysts as any one who listens to sell side analysts deserves to lose their money...

 

[Hector13]

Originally posted by: Shantanu
The market cap of a company is based on the present value of all expected future earnings (dividends).

stated like a true 2nd year finance major
If a company's stock price was in any way related to their dividends (ie, through a DDM like model), there would be many stocks that had no value (as they don't pay dividends). What do you do with these no dividend paying stocks? Use free cash flow analysis? In the end, these models don't seem to work too well as nobody know what the right "growth rate" or "cost of equity capital" (ie, required rate of return) is.

The semi-strong theory of market efficiency, which holds that stock prices are based on all publically known information, and anyone trading on this information can't expect to obtain abnormal returns, holds up pretty well. As soon as any new information is released, prices adjust immediatly. You can never act on new info (with the expectation of improving your returns), because by the time your order reaches the trading pits the prices will already have adjusted. If you know of any Wall Street investment banking analysts who are making 50% returns on their investments, they're probably trading on inside information and will get caught sooner or later.

whoah, the semi-strong form... maybe a 3rd year finance major
I'm not gonna argue with E. Fama here, but I think many people have been able show that the semi-strong form is in no way an absolute truth. The weak-form I buy (as you said, technical analysts are a crock), but the semi-strong for can't explain things like "the january effect", the "size effect", the "book-market ratio effect", etc. I am sure these are (or will be) covered in your finance courses.

Even the weak form has some shortcomings. For instance, price momentum has consistently shown positive (and significant) relationship with future returns. Basically, this just means that stocks that did well in the past continue to do well. Can you believe such a simple "model" actually works (granted, the results are "statically" significant, perhaps not economically so and this is based on cross-sectional returns).

 

[alrocky]

Originally posted by: Hector13

Originally posted by: alrocky Get a hold of Mutual Funds for Dummies by Eric Tyson. You should invest in your ROTH IRA before any other investment. If you made or expect to make at least $3000 this year, invest $3000 in your IRA. Invest as much money as you earned (up to $3k) into your IRA.

just to be clear, this is assuming (I hope), that you dont work somewhere where you have access to a 401K. If you do, you should always invest in your 401K first, then into any IRA.

Thank you for the clarification. If you all will note, Tim said he is still in college and can only muster about $500 a year. Much of the posts here are really not helping him out, guys.

Tim, care to elaborate what is in your IRA? Did you have any other questions or concerns before these guys hijack your thread?

 

[Shantanu]

stated like a true 2nd year finance major
If a company's stock price was in any way related to their dividends (ie, through a DDM like model), there would be many stocks that had no value (as they don't pay dividends). What do you do with these no dividend paying stocks? Use free cash flow analysis? In the end, these models don't seem to work too well as nobody know what the right "growth rate" or "cost of equity capital" (ie, required rate of return) is.

It doesn't matter if a company doesn't actually pay dividends. You still discount the present value of all expected earnings. Often you go by the assumption, well, what if they did start paying dividends, now or sometime in the future? Certainly, there are many variables here. Taxes. Growth rates. Timing. Discount rate. etc. But that's the general procedure that's used in finance to determine the market value of a firm. You ask 10 different analysts, and of course you'll get 10 different answers (perhaps ones differing by magnitudes).

No firm goes dividendless forever. Let's say you can live forever. You buy shares in a firm that is around (also forever), which has stated that it will never pay dividends (and never does). Then your investment is worthless. You just paid cash for a piece of ownership in something that has no value.

One thing I can tell you though, it sure as hell isn't assets - liabilities.