Investments. Yeah, we said it.
 
You’re probably thinking “I don’t know much about investments. They’re scary, and maybe even a little boring”. Boring? What? No! We think investments are cool. They rank right up there with pocket protectors and dad jokes. The prospect of learning about investments doesn’t exactly scream “FUN!”, but we think it’s important to arm you with at least enough information to start a conversation. Give us an opportunity to explain. We’re challenging you to take a few minutes, read our blog, and learn a little about the mysterious world of Mutual Funds.
  
Accept our challenge. We think you’ll be glad you did.

Great! Now that you’ve taken the challenge, let’s jump right in.
 
Investments are a very important part of your future. Whether it’s your retirement plan or an individual product, like an IRA or even a Trust, the choices you make now will impact the amount you have to use in the future, when you really want or need it.  

Let’s start by looking at mutual funds.
 
According to Google, a mutual fund is defined as an investment program funded by shareholders that trades in diversified holdings and is professionally managed. Put more simply, a mutual fund pools the money of many investors to purchase securities, and the fund’s manager then buys those securities to pursue a stated investment strategy. By being one of the investors in this fund, you’ll own a piece of the total portfolio of securities. It’s a convenient way to achieve instant diversification that would be harder to achieve on your own.
 
Think of it like going on a cruise. You choose the kind of trip you’d like to go on and pay to reserve your spot. Some people want to visit a variety of sandy beaches and relax, while others want to make stops where they can go exploring or get an adrenaline rush? Your desire and comfort level for adventure help you determine which cruise to book, and while you only pay one amount, the cruise line is responsible for making sure you get a variety of desired experiences and locations based on what you signed up for.  
 
In this example, the cruise is the mutual fund itself, the stops you make are the investments within the mutual fund and the cruise line is your fund manager. The fund manager invests in a variety of assets within the mutual fund including stocks, bonds, commodities and even real estate with the intent of getting income – or return – for you based on your investment. The amount of fun you have on your trip could be perceived as the return on your investment.

As you can tell, mutual funds allow for easy portfolio diversification, since a variety of investments are held within the mutual fund itself. Since there’s so much diversification, your risk is spread amongst a variety of places. If one sector of the market isn’t doing so well, you have other investments within your mutual fund that could still be doing well, and offset that loss. And, you can sell anytime. Since the price is set once, at the end of each open market day, it doesn’t matter if you sell in the morning or at 2pm, you’re getting the same price.

There is a bit of drawback to mutual funds as well. Sometimes having such a large portfolio can be daunting. If you start digging into each of the funds held within your mutual fund, you may find yourself feeling a bit overwhelmed. And then there are fees. While this isn’t necessarily a downside, since there’s no getting around paying fees for almost anything we do these days, it’s something to point out. No matter how the market does, up or down, you’re still going to pay fees.

There are a variety of fees you may incur, so let’s at least mention those. All mutual funds have expenses that are passed along to the investor, but the sales charge, or “load”, is probably the most significant and varied among funds. These charges are generally paid as commission to stock brokers, financial advisors or insurance agents. Some costs are paid up front (Front end load) and others are paid at the point of redemption (Back end load). It’s also important to look at a fund’s expense ratio, which is calculated by dividing the fund’s annual expenses by the fund’s average net assets. This impacts the fund’s net return. The higher the expense ratio, the less money is being put to work for you.

On the upside of expenses, at First Citizens Wealth Management you don’t need to worry about the load. We utilize Institutional share classes which have no loads and lower expenses than other share classes. And, we’re not compensated using commissions. As a fiduciary our investment team makes the best decision for your portfolio.

Next, let’s talk about the four basic mutual fund categories:

  1. Money Market mutual funds: These are the most conservative of the mutual fund family. The goal is to maintain the $1 value of a share while providing some income. These are not insured by the FDIC.
  2. Stock mutual funds:  As the name would suggest, these invest in stocks, also known as equity funds.
  3. Bond mutual funds:  Again, given the name, you can probably guess what these mutual funds invest in.  Bonds.  The object of these funds is to provide stable income with minimal risk.
  4. Balanced mutual funds:  The balanced funds invest in stocks, bonds and money markets. They are also called hybrid funds. 

The two most common mutual funds are Stock and Bond.  

Although mutual funds have been our main topic, we do want to mention some basics about another investment type– Exchange Traded Funds, or ETFs.

Like a mutual fund, an ETF pools the money of many investors and purchases a group of securities. But instead of having a portfolio manager who uses their judgement to select specific stocks, bonds and other securities to buy and sell, ETFs attempt to replicate the performance of a specific index. For example, an ETF might track the Nasdaq, S&P 500, or a bond index. Others might invest in hard assets like gold.  

ETFs, unlike mutual funds, are priced throughout the day and can be traded just like a stock. They can also trade at a price that’s higher or lower than its Net Asset Value, due to supply and demand.

ETFs have a low annual expense. Because of their passively managed nature, an ETF doesn’t require a portfolio manager or a research staff to select securities. That reduces overhead.
  
In closing, we’d like to extend the offer to give us a call. We LOVE to talk about this stuff, and now that you know enough to be dangerous, we’d like to talk to YOU! Call us at 641-422-1600. You can also email us at wealth@myfcb.bank.

We look forward to speaking with you. And remember, we are: A Team You Can TRUST.