Aggressive Growth Fund

  

A fund that just wants growth. No worries about dividends or even downside risk protection. No condoms.

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Finance: What Are Mutual Funds?189 Views

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finance a la shmoop. what are mutual funds? well half a century and change ago

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a bunch of investors wanted to mutually pool their assets to make investments [men carry bags of cash]

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together. they mutually agreed to abide by a relatively simple set of rules and

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then they gathered funds to go invest. well why would they do this?

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well scale. you've heard of the notion that you get a discount when you buy in

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volume or bulk right? well if not check these guys out

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84 pounds of dog food for five bucks. even Fido can appreciate a good deal

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when he sees it. dog food discounts we get but why would

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anyone need to buy in bulk when investing in stocks and bonds?

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well because back in the day the only way investors could invest in the stock

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market was to buy an individual stock directly. same deal with a bond. a

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typical stock might sell for 40 bucks a share. the problem was that if an

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investor didn't buy a round lot of these shares while she was charged a massive

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Commission. almost like a penalty for not being rich enough to buy a Costco type

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portion of shares. well a round lot is any order that comes in blocks of a

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hundred shares. ie 200 shares is a round lot, 500 shares is a round lot 738 shares

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is not a round lot. some high-level calculus there. well the typical round

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lot Commission might be 5%. an odd lot Commission might be 15%. so it made it

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even harder for the small buyer to get invested in the market.

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on a purchase of 100 shares at 40 bucks that's four grand. that's even a lot of

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money today but think about what four grand bought you in 1952. but more than a [calculator showing inflation]

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few hula hoops and a poodle skirt. inflation-adjusted it's almost 40 grand

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today. it bought this and this and yes this so how is the average Josephina

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able to plunk down 40 grand just on one stock?

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well she's not. you know your grandma gooses catchphrase right? well the same

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applies to investing four grand could be a life savings back then, and of a simple

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retail investor put all her money in one stock and that stock tanked, then she was

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Sol or sweetly out of luck. so mutual funds allowed that little guy investor

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with very small amounts of money and for most it was a minimum of about two

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hundred and fifty bucks, and it still applies today to pool his money with

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thousands of other investors and get exposure to a basket of stocks. the fancy

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$5 word here is diversification, and when assets are pooled that four grand of

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mutual fund ownership might look something like this. well if a thousand

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investors each put four grand on average into an investment pot well that would

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give the pot four million dollars of buying power and it allow them easy

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access or liquidity to have their four grand invested in a wide range of stocks

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and bonds in whatever form they want it. and with a large pot of money to put to

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work might they also get the ear of the company's CEO for 15 minutes a quarter?

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would that ear make them invest the dough a bit more readily smartly better?

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well maybe and at the end of the year let's say that four million was invested [chart picturing increase]

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well and it has a value of 4.4 million bucks, that is it went up 10 percent in

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a year. well when the thousand partners formed

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the fund they agreed that they would divide the fund into slices of pie in

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the same way that ownership of a company is divided into shares. well remember

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Apple has over five billion shares outstanding. they trade it in 150 bucks

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or so a share and multiplying the two together gives them a total market value

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today of over 800 billion dollars. well the mutual fund might have two hundred

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thousand shares outstanding so that at four million dollars of value

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you to get the net asset value per share, or nav. you divide that total pi value by

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the number of slices in it to get 4 million over 200,000 or 20 bucks a share.

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now if the fund goes up 10% the number of shares outstanding in this scenario [equation]

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hasn't changed, so the net asset value per share would be 22 bucks a share a

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gain of 10%. in real life however investors buy additional shares in a

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mutual fund and redeem them every day. why well they buy because rich uncle

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Larry died and left him a million bucks and they already had that cool caveman

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stereo. and they might sell because while the fund had a lousy performance and

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their P.O.ed. or they might sell because the fund had great performance

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and since they know that most investments regress to the mean ie

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come average over time, they want to sell their mutual fund shares take their

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chips off the table today and put the dough elsewhere. so let's say a new

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investor comes in and wants to invest 6 grand in the fund, which closed at the

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end of today at exactly 20 dollars a share. well let's also say that on this

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given day everybody was happy with their investment. nobody wanted to sell and

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nobody wanted to buy other than this one guy. well unlike bond shares an Apple

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Walter doesn't need another already existing investor to sell him the shares.

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he can buy six grand divided by $20 or 300 shares of the fund. those shares

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didn't come from a disgruntled or even a gruntled other investor. they were sold

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directly by the fund itself. well the analogous situation would be if

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Apple sold shares directly to the public. those things do happen they're called

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IPOs and they're also called secondary offerings, but they're not a daily event.

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so a mutual fund shares sell to the public every day like we noted, and after

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this transaction the investor now has 300 shares of this fund, a fund which now

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has two hundred thousand three hundred shares outstanding. the value of the fund

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went up the six thousand dollars that was put in so the funds value is now two

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hundred thousand three hundred times twenty bucks or four million six [equation]

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thousand dollars. and Walter now owns three hundred divided by two hundred

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thousand or 0.15 percent of the which is money we're sure he'll

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eventually spend wisely when he cashes out. he's having fun. you'll just have to [man drives red sports car]

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trust us on this one.

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