So, we’ve all been in these places…
It’s the quirky restaurant that every city seems to have, and the service isn’t very good- but all the diners think it’s part of the charm. They’re willing to put up with it, so they can feel like they’re “in on the joke”. They’re typically a tourist destination, and visitors hear about the poor service before they step foot in the door.
(Preview video): Top 10 Personal Finance Mistakes (And The Tools To Avoid Them)/ The Pilot Course
Poor service is OK for a quirky restaurant- but it’s a critical problem when it comes to investing. I spend a lot of time on my blog talking about what investors need to do to create a plan and meet their goals, but this post is about what you need- what you MUST have- from your money managers (financial advisors, mutual funds, retirement plan administrators).
Clearly presented account statements
One of the best innovations of the past 30 years is the improvement of how account statements are created, because today’s statements are much easier to read and digest. Now, I’ve often said that everyone needs to access (by mail on online) their investment account statement every month, read it and ask questions if necessary.
“Well, what if it’s been a bad month for my investments?”, you might ask. Read them anyway- because if you understand why your investments didn’t do well, you’ll get clarity about what investment you bought and how it will perform over time. Here are four important pieces of information every investor needs to make informed decisions about a mutual fund.
#1- Investment performance
Assume, for example, that you buy a Mountain Top mutual fund, and the fund has an investment objective to hold stocks in the Standard and Poor’s 500 index. The index serves as the fund’s benchmark, and the portfolio manager’s goal is to outperform the S&P 500 index over time. In the month of June, assume that the Mountain Top fund was down 3% year-to-date, and the S&P 500 index declined 4.5% year-to-date.
#2- Cost basis
Ok- what, exactly do you need to take away from your mutual fund statement? First, you need to know your cost basis- specifically the public offering price (POP) you paid per mutual fund shares, and the cost basis needs to be adjusted for stock splits and stock dividends.
Assume that you purchased 100 shares of Mountain Top find five years ago for $20 per mutual fund share. Over time, several stocks have had a 2-for-1 (or “2:1”), stock split, which means the number of shares doubles but the market price per share is cut in half. A stock split lowers the price per share, which is intended to make the stock more attractive to investors.
A stock dividend, on the other hand, means that you simply get more shares of stock, but the market price stays the same. While a stock split doesn’t initially increase the value of your stock position, a stock dividend does increase the value of your holdings.
So, assume that after adjusting for stock dividends and splits, you now own 120 shares at a net asset value (NAV) of $25 per share. Investors buy at the POP (similar to an ask price) and redeem mutual fund shares at NAV (the bid price). You own a position worth $3,000 (120 shares at $25/share), and your cost basis is $2,000.
The number one issue that can cause an investor to throw up their hands and sell an investment is market volatility. Beta is a term that measures the volatility of an investment in comparison to the broad market or a specific index. A mutual fund with a beta of more than one fluctuates more than the index, while a beta of less than one means that the fund has less volatility. If your investment statement does not list your fund’s beta, you can find the statistic on Morningstar.
#4- Investment objective
So, in June, Mountain Top fund was down 3% year-to-date, and the S&P 500 index declined 4.5% year-to-date, which means that Mountain Top is outperforming the benchmark slightly. If the decline causes anxiety for you, check that investment objective again. You’ll find the objective by pulling up the summary prospectus or the entire prospectus- and it would be great if your fund manager included the investment objective in your monthly statement. If any of this information is not clear or difficult to fund, contact your investment firm- nail down how you can get this data.
As always, these posts are for informational purposes only. Consult a financial or tax advisor as needed.
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
(website and blog) http://www.accountingaccidentally.com/
(you tube channel) kenboydstl
Wall Street Two Signs
Terrapin Flyer, Wall Street (CC BY-SA 2.0)