Automatic investment and reinvestment plans

Most fund families make it easy to set up an automatic investment plan, which is an excellent way for you to develop a consistent practice of saving. When you opt for automatic contributions to an investment account, you can also take advantage of the benefits of dollar cost averaging.
Ask your fund company for information about how to establish an automatic investment plan. You determine the amount that you want to designate — $100, $300, $1,000 — and the sum automatically comes out of your bank account each month and is invested in the fund of your choice. Plan to complete an application form and send in a (voided) check from your bank account.
You can also have the dividends and capital gains income from your funds automatically reinvested, buying you additional shares. I strongly recommend reinvesting, because it allows you to enjoy the benefits of compounding.
Most fund families will allow you to have your dividend and capital gains income reinvested in a different fund, which can be an easy way of diversifying your portfolio. Suppose Jacob has $5,000 invested in an index fund — a conservative, low-cost form of stock investment. He can arrange to have the dividends and capital gains from this fund invested in the fund family’s Aggressive Growth fund. As this amount gradually builds up, the growing investment gives Jacob the opportunity to participate in the profit potential of a more risky and volatile but often lucrative sector of the stock market — without taking any money out of his lower risk index fund investment.

Online information and transactions

With the advent of the Internet, most mutual fund companies now offer the same information online that you receive in your printed account statements. In addition, you can access many other types of data and services online, which relieves much of the time and effort involved in doing research via multiple phone calls, letters, or office visits.
For example, at the Vanguard Web site (www.vanguard.com), you can find such information as

• Historical data on how particular funds have performed
• The largest stock or bond holdings of particular funds
• Specific data about your accounts

Most of the things you do over the phone, you can also do online. For example, you can make investment exchanges between funds, request redemptions, and buy shares.
You can also download application forms and fund prospectuses, plus you can locate other literature on Web sites. Typically, you can access marketing brochures, articles on retirement investing, and speeches by officials at the fund company. With each passing month, fund families are offering more and more interesting online perks. You can look forward to finding retirement calculators, reports on the economy, glossaries of investment terms, mini-courses on investment fundamentals, and other services.
Vanguard, for example, offers WebTurboTax tax-return software free to its online shareholders. Many fund Web sites feature message boards and chat rooms where you can share information and questions with other investors or with the company guru who can respond to your inquiries. The Resource Center at the back of this book lists some of the more useful mutual fund Web sites, including those sponsored by fund companies and those established by independent companies or organizations.

24-hour phone lines

You don’t need to wait for a quarterly statement to get answers about your mutual fund account. Today, most fund families make information about your account as near as your telephone.
Some major fund families offer 24-hour phone lines staffed by real human beings — a welcome convenience for the millions of investors who find themselves living such busy lives that the only time they have to check their investments may be at 11:00 on a Wednesday night or 8:30 Sunday morning. Other fund families have phone lines with live representatives only during business hours; however, they usually provide a 24-hour automated response phone system that gives you access to your account balance and the current NAV of your shares and enables you to make exchanges between funds simply by using your telephone keypad. Your own coded personal identification number (PIN) protects your privacy, so only you can access the account.
On occasion, you may need to open a mutual fund account in a hurry. For example, you may want to make a qualifying IRA deposit on April 15 so that you meet the annual deadline for saving on your taxes.
Many mutual fund companies are willing to let you open an account and make a deposit by phone, even without a completed application on file, provided you submit the application soon thereafter. Call the fund of your choice, explain the situation, and provide the information the company requests, including the number of your bank account where the necessary investment money is on deposit. Then have your bank wire the money to the fund.

Why most fund investors are dissatisfied with their account statements?

Dalbar says that most fund investors are dissatisfied with their account statements for several basic reasons:

• The statement provides too much information. Although investors need complete data on their accounts, a fine line exists between comprehensiveness and overkill. When too much information appears on the account statement, an investor may feel overwhelmed. Fund companies are beginning to refine and improve their presentation of information by selectively eliminating less-useful data and by making the data they retain easier to read through intelligent design and use of graphics. For example, many funds now show an investor’s current asset allocation percentages using a pie chart rather than simply listing a set of numbers.
• The report requires investors to translate tricky mathematical terminology. For example, some fund companies provide statistics like “average cost per share” (a number that may be useful when calculating the taxes due on mutual fund shares you’ve sold), but they don’t describe how it was derived. This lack of information forces you to figure it out yourself. The best account statements explain the source and meaning of every number presented.
• The statement overestimates the investor’s knowledge. Fund companies often use language that the typical investor doesn’t understand. The best account statements include a brief glossary with definitions of technical terms.

When you invest in a new fund, study the first account statement carefully. Make sure that you understand every piece of data it includes. If you don’t, call the fund company’s information line and ask the representative to walk you through the statement, number by number. Jot down notes as you go. And don’t be afraid to ask “silly questions”! Having read this blog, you know more than the average investor, so your questions are probably not foolish at all. After all, your money is at stake here — you deserve to know exactly what it’s doing.

Account statements

Although every mutual fund provides shareholders with periodic reports on their investments, the quality, understandability, and comprehensiveness of these reports vary widely. Most mutual fund families provide quarterly statements that let you know what your current investment balance is, how many shares you own in each fund you’ve invested in, and your current asset allocation (that is, what percentage of your money is invested in which types of funds). In addition, the statement lists the transactions on your account since the last statement — new share purchases and redemptions; switching of money from one fund to another; dividend reinvestments; capital gain distributions, and so on.
If you have more than one mutual fund investment with the same family, you typically receive a combined statement showing all of your holdings rather than a separate statement for each fund. You also get a year-end statement for tax purposes, which shows balances and account activity for the entire year. The account statements provided by most mutual fund companies provide the basics; only a few offer the luxuries. Dalbar, Inc., an independent financial research company located in Boston, has developed quality rankings for account statements from various mutual fund companies. According to Dalbar, the top account statements, in ranking order, come from the following fund companies:
_ The WM group of funds
_ Kemper Funds
_ Montgomery Funds
_ The Dreyfus family of funds
_ The MFS family of funds
Why did Dalbar rank the WM Funds at the top of its list? Beyond the basics, WM provides investors with such data as their beginning and ending account balance for the statement period, the total account value, and the total return percentage per fund.
For investors who participate in the company’s asset allocation advisory services program, WM Funds reports the total return on investors’ asset allocation portfolios — a collection of investments in various categories that shifts over time in response to changes in market and economic conditions. Eventually, WM hopes to provide investors with personalized returns under this program, showing total return on a shareholder’s own asset allocation account. Like most good fund companies, WM is constantly looking for ways to apply new information technology to communicate data to investors more quickly and usefully.

Understanding Basic Services from any mutual fund company

The basic services that you can expect from any mutual fund company include the following:

• Regular written reports on the performance of your investments
• 24-hour, toll-free customer service
• The ability to exchange money between funds in the same family with relative ease and at little or no cost
• The ability to make additional investments easily and quickly
• The choice between having dividends and capital gains paid directly to you or reinvested in additional mutual fund shares
• Check-writing capabilities
• Professional advisory services

Beyond these basics, however, more and more mutual fund families are offering services that go above and beyond the call of duty. For some investors, the variety and quality of shareholder services provided is an important factor in choosing a fund or fund family in which to invest. It’s also important to keep in mind that the quality of basic services varies from one fund company to another. For example, account statements highlight the differences among various companies’ approaches.

401(k)s

Like an IRA, a 401(k) account enables you to save and invest for retirement with no current taxation either on the money you set aside or on the profits that accumulate over the years. You pay taxes on the money in your account only when you withdraw it after retirement.
The main difference is that your employer must sponsor your 401(k) account. Most for-profit companies today offer 401(k) plans; in fact, the 401(k) plan has become the most common substitute for the traditional company-paid pension plan, which fewer and fewer firms now provide. As soon as you start any new job, ask about whether your employer offers a 401(k) plan and how you can begin to participate. Generally, this kind of plan is a wonderful deal for you. You can usually save any amount up to 10% or 15% of your salary, tax-free, with the money automatically deducted from your paycheck. (And,, this form of automatic saving is a great way to make regular investing a habit.)
Many employers match all or part of the employee contribution:
For example, if you set aside 10% of your weekly paycheck for your 401(k) account, your company may kick in half that amount on top of your own contribution. You can invest your 401(k) money in any investment vehicle offered by your employer. Most companies today make arrangements with large financial firms, including mutual fund companies, to provide an array of investment choices for their employees.
You’re likely to have stock funds, bond funds, money market funds, and other options to choose from, and you can divide your contributions among two or more fund types if you want. You receive regular statements about the growth of your account, just as with any mutual fund or brokerage account. If you leave your job, you will probably have the option of maintaining your 401(k) account, letting your money continue to grow tax-free until you retire. However, if you choose to receive the money in your account instead, you have to pay taxes and an IRS penalty on it — unless you roll your investment over into a rollover IRA, a new 401(k), or another type of tax-deferred account. Any fund company, broker, banker, or other financial professional can help you with the paperwork and other details.
A 403(b) is a similar type of account offered to employees of nonprofit organizations — schools, hospitals, and so on. If you have the option of participating in a 401(k) or 403(b) plan at your place of work, sign up as soon as you can. For almost every investor, these plans are a great way to grow your money tax-free, usually with help from your employer. Your 401(k) account can become the backbone of your savings plan for a happy and secure retirement.

SEP-IRAs

This is a special type of IRA for people who run their own small businesses (the acronym SEP stands for “self-employed person”). If you’re a freelancer, a temporary worker, or a selfemployed professional of any kind, look into a SEP-IRA account. This account enables you to invest up to 15% of your annual earnings in a retirement account free of current taxes — a significant advantage over the ordinary IRA. Another similar type of account is called the Keogh plan. The plan enables self-employed people to set aside even more tax-free income — usually up to 20% of your annual earnings — but the process involves a significant amount of paperwork, which may not sound particularly appealing to you.