2022 AFBA Financial Planning Guide

ones. The open–end mutual fund is the largest and most popular form of mutual funds. Funds can be categorized by their investment objective with growth funds focusing on achieving capital gains, income funds concentrating on dividend and interest returns, and balanced funds seeking the best combination of both types of return. Individual investors should concentrate on funds whose investment objective agrees with their particular goals. There are a number of advantages to using mutual funds for your investment dollars. By pooling investment capital, smaller investors are able to achieve a higher degree of diversification than they could achieve individually. Also, mutual funds offer convenience, marketability, reasonable investment size, and experienced professional management. Many funds offer various investor services including automatic investment and reinvestment options, monthly withdrawal plans, and conversion privileges which allow investors to quickly move their money from one fund to another. The down side of mutual funds can be the various charges including front-end charges for buying into the fund, back- end charges for selling your shares, fund management fees, and 12b-1 fees which are used to cover distribution and marketing costs. Investment research indicates there is no correlation between fund performance and the charges levied by the individual funds. The bottom line is that it is worth your time to shop around and compare fund performances and related fee structures. After deciding that you would like to invest in a mutual fund, the following factors should be considered: (a) Pick a fund that coincides with your own investment objectives and investment policies. This information can be found in the company’s prospectus; (b) Look at the fund’s past performance in light of its objectives — this can also be found in the prospectus; (c) Compare a fund’s performance

Preferred Stock . Preferred stock is a unique type of security that possesses both debt and equity characteristics. It is similar to a bond in that it promises to pay a fixed amount of income (a dividend) on a periodic basis. It is similar to common stock in that it represents ownership in the issuing company. Relative to common stock, the preferred stock investor enjoys certain preferences. These preferences relate to priority in the receipt of dividends and priority in the return of capital at the time of liquidation. However, unlike the common stock investor, the preferred stock holder generally does not have the voting power necessary to elect members to the company’s Board of Directors. Convertible Securities. Convertible securities are bonds or preferred stock which have been issued by a company with a provision that allows the investor to convert their investment into a specified number of common stock shares. For example, a $1,000 convertible bond with a 40 share conversion ratio provides the bond investor with the ability to trade in their bond for 40 shares of common stock. When an investor buys a convertible security, they buy both the opportunity to periodically receive an income return and the opportunity to realize a capital gain if the market value of the common stock goes up. For example if the market value of the bond with a 40 share conversion ratio goes to $30 per share, the investor could trade in the $1,000 bond for 40 shares of stock worth $1,200. 10–8. MUTUAL FUNDS. Mutual funds are pools of income producing securities whose shares are sold by an investment company. Closed–end funds generally sell a fixed number of shares which may subsequently be traded between investors (like other shares of stock). Open–end funds are investment companies that initially sell their shares directly to the individual investor and subsequently redeem their shares whenever a shareholder wants to sell their holdings. With open–end funds the number of shares is continuously changing as investors purchase new shares or redeem old

STOCK MARKET AVERAGES/INDICES

(Sources: Various websites, January 2022)

Average/ Index

Index Composition

Value on 31 Dec 20 Value on 31 Dec 21 % Change

Dow Jones Industrial Average

30 large companies 500 large companies

30,606

36,338

18.73% 26.89% 21.39%

S&P 500 Index

3,756

4,766

NASDAQ Composite Index

Stocks traded on NASDAQ

12,888

15,645

CHAPTER 10: SAVINGS & INVESTMENTS

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