The clairvoyant society of Wall Street will not meet Tuesday because of unforeseen circumstances.

No matter how cynical you become, it’s never enough to keep up.

Lily Thomlin

From last week

7. You are your own worst enemy, beware.

8. Costs Kill

• Fiduciary: a person with a legal obligation to place your interest above his own.

• Your broker is not a fiduciary…

8. Costs Kill

• Equity mutual funds lose your money…’

• Do not outperform index funds…• Does not apply to bond funds…

• ETFs??? Indexed Equity ETFs are fine• Market Capitalization determines index

Mutual Funds

• All hold underlying investments • Charge management fees (expense ratios) • May distribute income and capital gains

• NAV = Net Asset Value = the market value of the securities held by the fund per unit

OPEN ENDED aka MUTUAL FUND• Bought and sold from the fund company • Holdings are selected by the fund manager• Buys or sells holdings daily as funds flow in or

out and issues or redeems units at the end of the day with a NAV calculated at the close of the market

• The price of a unit always = NAV

CLOSE ENDED OR CEF

• Trades like a stock on a market exchange• Holdings are selected by the fund manager• The price of a unit is determined by the

market and is seldom = NAV• May be leveraged

INDEXED FUND

• Trades like a stock on a market exchange• Holdings equate to an index or asset class• Holding change with a creation/redemption

feature• The price of a unit is determined by the

market but = NAV, very closely• May not be leveraged• Does not distribute capital gains

“Mutual Funds”

• True Mutual Funds

• Exchange Traded Funds (ETFs)– Close Ended Fund (CEF)– Indexed Fund

8. COSTS KILL

LARGE CAP

SMALL CAP and FOREIGN

EMERGING MARKETS

Expense Ratio

1.3 1.6 2.0

Commissions 0.3 0.5 1.0

Bid/Ask Spread

0.3 1.0 3.0

Impact Cost 0.3 1.0 3.0

Total 2.2 4.1 9.0

Index Funds 0.23 0.6 1.47

CEFs and ETFs

• To learn more:

• http://www.cefconnect.com/Education/EducationCEF.aspx

Why I trade with Schwab

• Personal service • Indexed ETF funds with low operating costs • Can Buy funds from many companies

including Vanguard and Fidelity (iShares)

• (An excellent debit card for travel)

Next Week’s Key Points • Text Chapter 6 Pages 143-177• You may skip his long examples since they don’t

apply to us…pages 154 - 166• Save your whole life long• Saving, spending in retirement and Social Security

deferment (I will disagree next week)• Dollar and value cost averaging – key tools in

executing an investment plan.• Rebalancing

Municipal Bonds

• Municipal bonds are federal tax exempt (Alternate Minimum Tax) • North Carolina municipal bonds are state

income tax exempt as well, perhaps.

• Many municipal bond funds are leveraged.

Leverage

• Increases income and hence returns• Have higher expense ratios - pay loan interest• By Rule #1 – they must be more risky

– In terms of return variability and price– Not in terms of default

• Muni’s can default under Chapter 9; but• At the rate of 1/10 of 1% over the past 40

years.

Handouts

• Illustrations

• NOT RECOMMENDATIONS

• Numbers NOT current

Munis

Company Fund Exp Rat.

Distribution

Duration/ Ave.Maturity

Vanguard VWITX pg150

0.20% 2.99% 4.81/5

Fidelity FLTMX 0.37% 2.67% 4.73/5

Nuveen NQS (lev) 1.04% 5.73% 8.75/?

Pimco PMX (lev) 1.28% 6.66% 12.55/11.21

NC Munis

SYMBOL COMPANY EXP. RATIO

MINIMUM DISTRIB. Duration/ Ave.Maturity

NTFIX Dupree 0.72 $2,500 3.09% 4.86/4.88 No AMT

NTSMX Dupree 0.81 $2,500 1.74% 2.8/2.81 No AMT

NNC Nuveen 1.01 ETF 4.50% 8.35/NA Leveraged

Loads? 12b-1 ?

FUND EXP RAT. DISTRIB. LOAD 12B-1

NNC 1.01 4.50% 0 0

FLNCX 0.80 3.26% 4.20% 0.20%

ENCMX 0.85 3.03 4.50% 0