All posts for the month December, 2011

investmentMutual funds are perhaps the easiest and least stressful way to invest in the market. In fact, more new money has been introduced into funds during the past few years than at any time in history. Before you jump into the pool and select a mutual fund in which to invest, you should know exactly what they are and how they work. As part of a Beginner’s Guide to Investing in Mutual Funds, this article can give you the foundation you need to start understanding mutual fund investing.

What is a mutual fund?
Put simply, a mutual fund is a pool of money provided by individual investors, companies, and other organizations. A fund manager is hired to invest the cash the investors have contributed. The goal of the manager depends upon the type of fund; a fixed-income fund manager, for example, would strive to provide the highest yield at the lowest risk. A long-term growth manager, on the other hand, should attempt to beat the Dow Jones Industrial Average or the S&P 500 in a fiscal year (very few funds actually achieve this; to find out why, read Index Funds – The Dumb Money Almost Always Wins).

Closed vs. Open-Ended Funds, Load vs. No-Load
Mutual funds are divided along four lines: closed-end and open-ended funds; the latter is subdivided into load and no load.

• Closed-End Funds
This type of fund has a set number of shares issued to the public through an initial public offering. These shares trade on the open market; this, combined with the fact that a closed-end fund does not redeem or issue new shares like a normal mutual fund, subjects the fund shares to the laws of supply and demand. As a result, shares of closed-end funds normally trade at a discount to net asset value.

• Open-End Funds
A majority of mutual funds are open-ended. In simple terms, this means that the fund does not have a set number of shares. Instead, the fund will issue new shares to an investor based upon the current net asset value and redeem the shares when the investor decides to sell. Open-end funds always reflect the net asset value of the fund’s underlying investments because shares are created and destroyed as necessary.

Load vs. No Load
A load, in mutual fund speak, is a sales commission. If a fund charges a load, the investor will pay the sales commission on top of the net asset value of the fund’s shares. No load funds tend to generate higher returns for investors due to the lower expenses associated with ownership.

What are the benefits of investing through a mutual fund?
Mutual funds are actively managed by a professional money manager who constantly monitors the stocks and bonds in the fund’s portfolio. Because this is his or her primary occupation, they can devote considerably more time to selecting investments than an individual investor. This provides the peace of mind that comes with informed investing without the stress of analyzing financial statements or calculating financial ratios.

How do I begin investing in a fund?
If you already have a brokerage account, you can purchase mutual fund shares as you would a share of stock. If you don’t, you can visit the fund’s web page or call them and request information and an application. Most funds have a minimum initial investment which can vary from $25 – $100,000+ with most in the $1,000 – $5,000 range (the minimum initial investment may be substantially lowered or waived altogether if the investment is for a retirement account such as a 401k, traditional IRA or Roth IRA, and / or the investor agrees to automatic, reoccurring deductions from a checking or savings account to invest in the fund.

The importance of dollar-cost averaging.
The dollar-cost averaging strategy is just as applicable to mutual funds as it is to common stock. Establishing such a plan can substantially reduce your long-term market risk and result in a higher net worth over a period of ten years or more.

How do I select a fund that’s right for me?
Every fund has a particular investing strategy, style or purpose; some, for instance, invest only in blue chip companies. Others invest in start-up businesses or specific sectors. Finding a mutual fund that fits your investment criteria and style is absolutely vital; if you don’t know anything about biotechnology, you have no business investing in a biotech fund. You must know and understand your investment.

After you’ve settled upon a type of fund, turn to Morningstar or Standard and Poors (S&P). Both of these companies issue fund rankings based on past record. You must take these rankings with a grain of salt. Past success is no indication of the future, especially if the fund manager has recently changed.

Volatility Risk from Lowest to Highest:
The easiest way to remember it is to ryhme it from lowest to highest as follows. (My, Mother, Buy, Baby ducks, Eggs, In, Spain, and Rome.) The higher the return the higher the risk.

This is for illustration purposes only.
R Real Estate Funds 11-12% rate of return
S Specialty Funds 9-10% rate of return
I International & Foreign Funds 7-8% rate of return
E Equity 6-7% rate of return
D Dividend 4-5% rate of return
B Balance Funds 2-3% rate of return
B Bonds 2-3% rate of return
M Mortge Funds 1-2% rate of return
M Money Market 1-2% rate of return


Buyer Mistake #1: Making an offer on a home without being pre-qualified

Buying a home in Toronto, ON. (or anywhere) requires some homework. Whether you are planning on buying now or later down the road you need a well preparation. Buying a home is much more than just purchasing a new place to live it is one of the biggest investments you will ever make. Preparation is a key because you don’t wan’t to waste time on property that is above and beyond your budget or below your expectation. By pre-qualifying first can save you a lot of time and headache.

Buyer Mistake #2: Not considering long-term needs / not planning on staying at least two years

Many buyers tend to consider their immediate needs when buying a new home. It is important to think about your goals and have a concrete plan down the road. Will the space be enough if I get married? Have a child? What if I want to take on a roommate or move out and rent the place out? In addition, selling your home before the two-year mark may expose you to pay capital gains on any profit. You may also be subjected to a mortgage penalty for breaking your mortgage before the contractual deadline. Most importantly you also want to benefit from market appreciation and in order to do that you may need to stay put for at least 2 – 3 years.

Buyer Mistake #3: Limiting your search to open houses, ads, private sale or the Internet

Often, the syndicated web sites that feed from the Multiple Listing Service  are delayed by 48 hours (or more). As a realtor we frequently, we get calls for listings that were previewed on a syndicated web site that are already under contract and some have even closed already. For the most up-to-the-minute inventory, it is best to work with a Realtor® who can help you locate an up to date listing that meets your search criteria. Another thing to keep in mind when dealing with private sales is that often the seller is under no contract obligation meaning it’s a rules of the jungle. A prudent realtor can help you in negotiation and advice you of your rights as a buyer. 

Buyer Mistake #4: Not having a home inspection

While buyers tend to focus on the floor plan, paint colors, and finishes when buying their new home, it is crucial to make sure you are not buying a lemon property that may be plague with serious problems and become your very own problem. Once you have come to terms with a seller regarding price, closing date, and other terms, you have a short window of time to have a professional home inspector come out and inspect your home thoroughly. He/she will be looking for any structural, mechanical, electrical, plumbing, environmental, or pest problems. All things that may not be obvious to the untrained eye. If the inspection report does not meet your approval, you have the option to negotiate the items in question or terminate the contract and have your earnest money deposit returned. Bottom line is that you wan’t to buy a home that you can feel you are at home.

Buyer Mistake #5: Making large purchases, opening up new lines of credit/increasing credit balances or changing jobs during your loan application process

Once a mortgagor were approved of a mortgage loan it does not mean that it is final. Remember that lenders can pull the plug on a loan any time prior to the time that the funds are disbursed. Any change to your financial situation such as buying a new TV on a payment plan, leasing a new car, even test driving new cars at multiple dealerships or charging furniture before closing could jeopardize your loan. Opening up new lines of credit or increasing balances on existing lines of credit is harmful to your credit score. To be on the safe side, do not make changes to your credit profile until after closing. Also, don’t quit or switch job during the application process. Once a lender sense you are prone to not able to pay back your debt they can pull a plug on your loan. 

Buyer Mistake #6: Buying more than you can afford

There is no point of impressing others who don’t know you! Having a big house on the lot and nothing to eat is stupidity! You don’t wan’t to aquired a property that can be taken away from you later on when you no longer can afford it or have a debt on your shoulder in which you are not able to sleep peacefully at night. Your health is more important than any material things!

Buyer Mistake #7: Not knowing total costs of ownership

It is important to have a solid understanding from the very beginning how much money you will need for your entire home buying process: downpayment fee, closing fee, home inspection fee, lawyers fee, moving fees, brokerage fee (if applicable) and transfer of ownership tax (in the city of Toronto there is a two taxes, Ontario tax and city of Toronto land transfer tax).

Buyer Mistake #8: Purchasing a home with an incurable defect

In real estate it’s all about location! location! location! You may love the space, the floor plan, finishes, and the proximity to all your favorite neighborhood amenities, but it is important to think about resale value. Being right next to the train tracks, or situated on a noisy/busy intersection, or under airplane noise cone, or having power lines running next to your bedroom window or through your backyard, having a commercial or industrial property as your neighbor can make resale extremely difficult. It is called a principle of regression.

Buyer Mistake #9: Bidding before seeing a property CMA

Before making an offer to purchase a home, you must have an accurate idea of market value to ensure you do not overpay. Your real estate agent will prepare a comparative market analysis (CMA) showing comparable properties, what similar homes in the neighborhood have recently sold for and the recent price trends. Are you buying in an appreciating neighborhood or depreciating neighborhood? This is the same type of report the seller receives when deciding on an asking price. You wan’t to avoid a property that being sold with material latent defect any defect in construction that can occur later down the road. 

Buyer Mistake #10: Choosing a real estate agent who is not committed to forming a strong business relationship with you

You want to avoid a needy agent who is only after a commission. Who really pays the price? You! All realtor are sales person some are competent and there are some incompetent ones! Remember a role of a license real estate agent is to protect you from any problem that may arrise before, during and after the transaction. So choose who you work with wisely!