Life Situation Financial Date Pam 43 Monthly income $4,900 Josh 45 Assets $262,7
ID: 2628686 • Letter: L
Question
Life Situation Financial Date
Pam 43 Monthly income $4,900
Josh 45 Assets $262,700
Children ages 16, 14, and 11 Living expenses $4,450
Liabilities $84,600
Emergency fund $5,000
In recent years, the Brocks have made extensive use of mutual funds in their investment portfolio. However, they are concerned that their selection of the funds may not be coordinated. With over 9,200 different mutual funds, available this financial marketplace is confusing. The Brocks start the evaluation process by connecting various types of mutual funds to their investment goals. Next, they assess the past performance and management of the funds. Finally, they talk with various financial advisers and other investors to gather additional information.
1. How might Pam and Josh use mutual funds for various investments goals.
2. What types of mutual funds might be considered by the Brocks for their investment portfolio?
Explanation / Answer
Past performance
Although past performance is no guarantee of future results, a fund's track record over the past 3, 5, and 10 years is certainly worth considering. How does it compare with its peers--funds with similar risk and investment strategies? Apples-to-apples comparisons of funds are difficult, so a variety of broad market indexes are used as comparison benchmarks. For example, the S&P 500 is often used as a proxy for the U.S. stock market as a whole. Examine how well the fund that you are looking at has performed in both good and bad years relative to the most appropriate benchmark index.
Fund managers
One of the advantages of purchasing shares in an actively managed mutual fund is professional money management. The past performance of the fund is a reflection of the fund manager's ability to effectively manage its assets. You should research the current manager's history with the fund; was the fund's performance his or her achievement? If the fund has a new manager, make sure that individual's investment style matches your expectations.
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