From: acheng@ncsa.uiuc.edu (Albert Cheng)
Subject: Re: Mutual Funds or I.R.A.'s?????
Originator: acheng@shalom.ncsa.uiuc.edu
Organization: Nat'l Ctr for Supercomp App (NCSA) @ University of Illinois
Date: Wed, 30 Dec 1992 16:27:17 GMT


In article <1992Dec30.093506.585@hnrc.tufts.edu>, loszewski_im@hnrc.tufts.edu writes:
>Thanks for all the replies I got to my post regarding mutual funds.  I realize
>I need to get into the reading and research, but I would like everyone's 
>opinions on one other thing.
>Being 23, which would be better to invest in, mutual funds, or an I.R.A.??

It is not an either OR question.  IRA is a tax-defer account.  Mutual
fund is an investment method.

IRA (Individual Retirement Account) is tax term.  It is intended for
retirement saving--no tax for its earnings until you withdraw it, but
you can't withdraw from it until 59 and a half years old.  (If you
withdraw early under some special conditions, you have to pay 10%
penalty and pay income tax.)

The main benefit of IRA is tax-defer.  You are using tax money to earn
money for you.  It is also a prudent way to save money for your
retirement.  (Count your Social Security tax as good as gone.)
The drawback of IRA is the money is all locked up.  You can't use
it before 59.5 years old without penalty.

Mutual funds are investment methods.  Basically, you send money to
a mutual fund manager(s) and they, together with other people's money,
invest them in all kinds of investments (stocks, bonds, treasurey bills,
housing, ...).  They then distribute the profit eventually back to
all depositers according to how much they have sent.

The main benefit of mutual funds is that you can invest in some big money
investment (e.g. stocks or bonds) with small sums and you have builtin
diversification instead of putting all your money in stocks or bonds
of one company, risking total loss if the company goes belly up.
The fund managers supposedly provide full time professional investment
while you go on your own job and life.  The drawback of them is you have
to pay management fees (could 1-3% annually and 3-8% commission).

So, you can have money put in IRA accounts and have it invested in
bank CD's or mutual funds or buy stocks.  But you can do the same
with NON-IRA accounts money.

If you have money to invest and don't know what is going on, mutual
funds would be a good starting point.  Put an amount you can afford
to lose (Not your grocery money) into some conservative funds (e.g.
Janus fund or Vanguard index).  Get the feel of it.  When you feel
more comfortable and more educated, fan out to more aggresive funds
or into buying stocks yourself.

Whether you should put money in an IRA is more complex.  It depends
on your income level, tax situations, life plan, ...  My own philosophy
is:

	1) Put aside some cash reserve for emergency (e.g. medical
	   needs, unemployement,...).  Roughly the amount of 6 months
	   income.  Put this in saving or money market accounts.

	2) Saving for the down payment of purchasing a house.  Put this
	   in some conservative mutual funds (e.g. Government bond types)

	3) Join 401(k) or 403(b) retirement options if your employer
	   offers them.  Remember this money are not touchable till
	   retirement.  If none of them but you are still eligible
	   for the $2000 deduction on IRA, start one.  Again, you
	   can have IRA with banks or with mutual funds.  In this
	   case, you may consider more aggrasive mutual funds since
	   you are still young to afford losing some principle in
	   exchange for bigger potential gains.


Hope the above helps.  Good luck.

Newsgroups: misc.invest