Federico Echeverry

Mutual Fund Project

November 19th 2015

Finance 345

Any major investment requires extensive preparation, research, commitment, but

most importantly patience. Over the past weeks Ive analyzed my current financial
situation, the potential real world application of this project and the learning experience it
represents, all this in order to maximize the value of the task. In this section I will
breakdown the financial present I live in, discuss the opportunities I am looking for after
graduation, name the potential obstacles in the forthcoming months and the investment
goal beyond this project.
As of November 2015 I have no debt and I plan to graduate without incurring any
student loans. This is a major advantage compared to the average student, this financial
freedom can allow my investments to be riskier if I require them to. Although I have no
debt, I also have no major assets, I do not own a car, house or land. This is not an
alarming aspect, as all students learn in financial accounting, a vehicle is considered a
typical asset, some people might say a car is an investment!. Personally I do not share
that idea, a car is not an investment, mainly it is an expense, it does not grow in value as
time passes (it only gets hit by devaluation). As for real state, I pretend to acquire one or
two properties in my early 40s, it is not a main concern. My ideal goal is to retire before
my mid 50s, evidently I would work for a couple of years more but only part time. I
intend to explore and adventure even when retired.
My first objective is to establish and develop my career either in Kansas City or in
Chicago, IL. Although my major is Finance, I am minoring in Marketing and have the
possibility to minor also in mathematics, which depending on the budget, I will most
probably attempt to acquire. This broad range of skills I have learned over the past
couple of years in school allow me to broaden my industry search spectrum. I am
focusing on some specific positions, campaign specialist at an advertising/marketing
firm, quantitative analyst at a hedge fund or investment bank, supply chain analyst at a
transportation company. All these positions have a fantastic career growth path with a
good amount of vertical mobility in the first couple of years, aside this, my passion for
circuits and electronics could potential land me a new career. To make the discussion as
simple as possible we will not consider any 180 career turns in the coming future.
Following the scenario proposed by the paper, I landed my first job at one of my ideal
starting positions, research shows that the average salary for these is between $45,000
to $55,000. Assuming negotiations and offers go as normal a $50,000 salary with a
signing bonus of $10,000 will suffice for the sake of the discussion. Recalling my current
financial situation in which I have no debt whatsoever, this allows me to focus all my

residual money towards investments. With the initial $10,000 I would open 4 accounts,
money evenly split between them. Two accounts will have a time horizon of short
medium (10>years) in which I will focus on emerging markets or industry specific
indexes that potentially could grow and create a great gain. The other two will be
invested into more traditional, conservative and less volatile funds that wont have as an
objective to outperform the market (15>years).
The key to succeed, as discussed in class regarding the Dalbar studies, is to let
investments grow as the market grow and do NOT chase performance so desperately.
My strategy gives a good hint on the type of investor that I will be and the type of risk I
will tolerate. Because it is not my main goal in life to daily trade stocks I will not fall into
the trap of chasing performance as said before, this will allow the two moderate funds to
grow as the market grows, slowly but steady. The other two funds will be far riskier; the
idea is to invest in certain commodities due to the current situation their markets. There
is a greater possibility to incur loss with these two funds, initially the idea is to invest only
the corresponding $2.500, no additional capital will be added unless some benchmarks
are achieved.
Before we start developing the core of the discussion, after much research I have
come to the conclusion that due to active mutual funds extra expenses (management,
administrative, 12b-1 fees, etc) and the fact that I could potentially lose anywhere from
1% to 2% of my long term investment, I have decided to not invest in any active mutual
funds.

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The first moderate oriented fund would be Vanguards 500 Index Fund - Admiral Shares
(VFIAX)
The goal of this fund, according to its prospectus, is to track the performance of
a benchmark index (S&P 500) that measures the investment return of largecapitalization stocks. This investment will follow the same performance as the S&P 500.
The fund was created in 200 by the Vanguard group, due to its index nature it
does not have a traditional manager, it is controlled by the Vanguard Equity Investment
Group. As discussed in class, the human intervention can be a major factor in mutual
fund performance, some managers tend to outperform the market with their strategies
and knowledge. Apart from cost, the reason why Index funds are my choice is mainly to
minimize risk and cost, a traditional mutual fund with a manager would bring those two
items to the equation.
While index fund is not risk-free, it allows my investments to grow on one of the
set benchmarks that individuals often try to match, the S&P 500. While the risk of a stock
collapse is always a possibility, the fund can potentially allow an investment to grow
enough for 15 years before moving into a more conservative type of investment.
The main reasons why this fund came over some others are very simple:

Minimal operating expenses and no load fees, the VFIAX has a total OE of 0,050%.
This is a key factor in all of the funds, the less money lost in fees, the more money is

available for growth.

Same performance as the S&P 500, while most of the investors attempt to
outperform this benchmark, most of them fail to even match it due to chasing

performance and lost money in commission fees, bid-ask spread.

No human factor, although I recognize the brilliance of managers, the volatility that
the human factor brings to the equation (plus its fees) is not worth the risk in my
opinion. The ordeal is to find a manager that has at least performed as good as the
S&P500 and that the fund wont replace him with someone without the Golden
touch.

Other funds that were taken into consideration were Fidelitys Spartan 500 Index Fund
- Investor Class & Fidelity Advantage Class, both same S&P 500 index funds but both
have a higher maintenance fee, 0.1% & 0.07%. Again, the less the operating expenses,
the more capital can be invested every year.
pg. 3

pg. 4

The second moderate fund to invest in would be State Streets SPDR S&P
400 Mid Cap Value ETF (MDYV)
According to the prospectus the fund seeks to provide investment results that
correspond generally to the total return performance of an index that tracks the
performance of medium capitalization exchange traded U.S. equity securities exhibiting
value characteristics.
This Mid-Cap Value ETF was created in 2005 by State Street and its managed by
the SSGA Funds Management, Inc. Again, as seen before tracking indexes can be
outperformed by great fund managers, the problem relies to successfully find one,
instead I continue to trust the index funds due to the fact that it guarantees me the same
performance as a certain benchmark. Since its inception the fund has had a
performance of around 7%.
The main reasons why I chose this fund over other are:

Market security while having a good performance fund. While the VFIAX aimed at
the Large Cap, already established firms, this MDYV focuses on mid-caps that are
not as volatile as the micro and small cap stocks, but with return possibilities like

those in the S&P 500 index fund.

Diversification and holding weight. This fund has diversified their holdings so no
individual stock has a weight larger than 1.36%. Also, fund sector allocation has the
financial sector as the largest one with 26% and then 6 other industries where they

range from 6% to 15%.

The expense ration is quite low at 0.15%, which means that for the initial $2,500
investment, the fund would take $3.75.

Some of the other funds taken into were Target Retirement 2025 Fund and Long-Term
Corporate Bond Index Fund, both by Vanguard. The first of these two was rejected due
to the fact that is not aggressive enough, it has not performed above 7% since its
inception. The second option was rejected due to the fact that it was based of long term
corporate bonds, again not aggressive enough and the potential return is smaller due to
the emphasis in bonds rather than stock.

pg. 5

Fidelitys Nasdaq Composite Index Fund (FNCMX) is the first aggressive investment
I would perform. As seen with (VFIAX) there is an idea of outperforming the markets,
the problem is when lack of patience, combined with seeking performance and
loads, this creates a scenario where most of the individual investors will a) lose
money b) not perform as well as the markets.
The fund was created in 2003 and it is managed by the Fidelity Management
& Research Company. The objective of this index fund, according to its prospectus,
is to provide investment returns that closely correspond to the price and yield
performance of the NASDAQ Composite Index. Again, no human factor in this fund
will avoid us of some risk. The main risk associated with this fund will be down to the
composition, it currently has 45% of the funds weight invested into information
technology companies. This massive weight can either drive the fund to grow very
fast, but also to drop.
Same case as with the S&P 500 index fund, with this fund I am expecting a
higher return on my investment due to the larger diversification. The same strategy is
applied in this case, let both funds grow and after 15 years the capital will be
transferred into a more conservative portfolio.
The main reason why I chose this fund were:

NASDAQ performance, it has had a higher 5yr performance than the S&P 500

Index fund.
Very low expense ratio, 0.49%, which means that for the invested $2,500 I would

pay only $12.25.

Large diversification, it spreads the investment into several different industries
that in present times could outgrow others (such as the biotechnology)
Some of the other considered funds for these were the Emerging Markets Index

Fund from Fidelity, this fund has not performed well over historically even though it is
focused on BRIC economies. Second fund considered was Vanguards Energy Index
Fund, this fund is quite interesting, due to the fact of the potential rise in oil prices &
its weighted distribution for oil & natural gas companies of 38%. Although tentative
the price of the oil might fluctuate even more in the future due to the rise of
alternative energies.

pg. 6

The last aggressive fund will be oriented towards the Aerospace & Defense
industry. SPDR S&P Aerospace & Defense ETF (XAR) from State Street can be a
fantastic opportunity to invest in a growing industry.
The objective of this fund is to, according to the prospectus, provide investment
results that, before fees and expenses, correspond generally to the total return
performance of the S&P Aerospace & Defense Select Industry Index. Although it is
a risky industry due to the potential threats that some companies can experience, for
instance a new Boeing jet is released and during a commercial flight the plane has a
mechanical failure. Orbital ATK (direct competitor of SpaceX) attempts to launch a
probe to space but fails and the cargo is destroyed. All these factors can affect
severely the financial situation of the ETF.
However, I am expecting SpaceX to launch its IPO over the next 12 months, the
ETF would automatically add it to the funds holdings. There is a massive
expectation of the future of SpaceX, understandably, at the present the company
might not be fulfilling its main goal, but it has proven to show great advancements.
This would translate into
The principal reasons why I chose this fund are:

SpaceX IPO, Elon Musk has disrupted the industry by creating a fantastic
company with great potential. Awarded a contract of $1.8Billion by NASA to carry
out twelve launches for the agency back in 2008. The vision of an individual,
comparable of that of Steve Jobs, can make SpaceX the Apple of the Aerospace

industry.
Boeing growth, although its stock suffered after the initial reliability issues of the
new 787 Dreamliner, is starting to proof to be a fantastic engineering

achievement.
Defense industry, with the current situation in several countries, it is no surprise
that many experts predict the rise of stock prices in this industry. Although in the
ideal world there would be no wars, present time clearly evidences the urge of
some countries to increase their defense spending, which a savvy investor could
take advantage of.

pg. 7

A share considered was Vanguard Health Care ETF (VHT). Although the U.S spends
17% of its GDP in this industry, the potential gains in Aerospace & Defense might be
larger within the next few years, the health care industry could be safe ETF bet.
Recalling some key factors in my investment process such as:

Zero debt
No foreseeable home ownership for the next 20 years.
Retire in my mid 50s, adventure while young
Capability to invest large sums of money per month
Medium term horizon then moving into conservative strategies.

These items translate into an early retirement with the need for a good portfolio to
indulge my objectives. In order to achieve these goals, I will definitely need an
aggressive investment strategy, much more than the average individual that plans
out to retire at 65.
The selected funds are aggressive, risky, but with some key characteristics that
are similar across all of them them. First of all, the portfolio would have very low
expense fees, being the ETF the larges contributor of loads without being excessive.
As a result of this there will be more capital available so that the compound interest
and the stock market help us capitalize the gains. The second major item is the lack
of actively managed funds, while indexes are more fragile due to their nature, they
guarantee an equal return as the selected benchmark. This translates into less day
trading, less paid commissions, less capital lost in buy-sell spreads, etc. The third
major item is consistent returns on the markets standard benchmark, while a lot of
investors attempt to outperform the market, many of these fail due to not being
patience and the capital lost while chasing performance. As discussed in class, if the
investors would not dramatically seek to outperform the market and buy/sell
whenever a small fluctuation seems to be happening, they would have a higher
return in their investments. The reason why patience is key is the fact that everyone
has an average growth on their portfolio of 6%, while the market, and its
corresponding index funds, is at an historical 11%.
It is important to remember that these 4 funds would not be part of my portfolio
after 20 years, the idea would be to transition into more conservative and traditional
type of investments. The idea here is to fully take advantage of my zero-debt
pg. 8

situation and invest aggressively in order to grow my portfolio as much as possible

early on
Individually each fund attempts to achieve the idea of real as-good-as the market
performance and not chasing performance. While VFIAX and MDYV tend to follow
some of the strongest companies in the market right now, this does not assure me to be
a risk free investment, but at least provides me with a strong foundation. These funds
holdings contain mainly value stock, carrying less volatility than growth stock. As
commented in the investing process, the idea is to have two sets of funds that have
moderate risk, with VFIAX & MDYV I have the mix of Mid and Large cap companies.
These firms are less volatile than small-cap index funds, the selected investments
include in their holding established companies that have performed well and overall are
financially healthy.

The aggressive investment strategy is two sided, ideally ( FNCMX) will keep

performing like it has done over the past years. The remarkable aspect of this fund is
the fact that while most of the Mutual Funds and other ETFs have recovered their
losses from the 2008 financial crisis, while also growing investors portfolio, the
NASDAQ composite index has over-performed many other indexes over the same
time period. Compared to the VFIAX, where an initial investment of $10,000 10
years ago would result in a present day equivalent of $21,270, the same investment
over the same time period but in FNCMX results in $25,951.
The XAR fund brings a new dimension to the portfolio, evidently it is far riskier
than any other fund in this discussion, but it has the potential to grow due to the
nature of its industry. The current global stability has been threatened by several
radical movements across the world, the large countries involved in these conflicts
have led to an increase in defense spending. Seizing this opportunity is important, it
also important to notice that the fund also matches our short-medium time horizon.
The XAR investment has also the great possibility to take advantage of a new era of
space developments, with private companies such as Orbital ATK and SpaceX
(hopefully releasing its IPO soon) the Aerospace industry has started to flourish
again, plans for several missions towards different confines of the universe have led
massive amounts of investment from government agencies. As discussed before,
pg. 9

SpaceX is currently performing successfully the launches for NASA missions, seizing
the opportunity in this new era of space exploration is key for this portfolio.
The research that this project has taken has given me great insight into the
different markets, funds and industries. It has also allowed me to understand my
goals and investment behavior, while my knowledge of the investment world is still
very miniscule compared to established Financial planners that have years and
years of experience. I believe I can do a fairly decent job managing my own portfolio,
the main thought that comes to mind is the lack of commission fees and loads that I
would be taking advantage of. As said in class, in a lifelong portfolio these fees can
cost the investor up to 2%! This might not sound like much but when you take into
account the compound interest factor then you realize how much capital that small
2% could have grown out to be.

pg. 10