Dear Friends,
Earlier this year (in my Feb. 7 and Feb. 14 columns) I wrote about the need to periodically review and re-balance the investments you own. I walked you through the free tools available at http://www.morningstar.com and invited you to write to explain why you felt you should receive a copy of the Morningstar book “Find the Right Mutual Funds.”

I heard from nearly 200 of you! Contrary to what some of you suggested, there is no “screener” who weeds out my emails. I personally read every one of them. It was tough picking 24 winners. I tried to select people who represented a cross-section of everyone who had submitted a request: men and women; singles as well as married individuals; those just starting their careers and those in or near retirement; civilians and those in the military.

If your name wasn’t selected, you can purchase this book plus two others, “Diversify Your Fund Portfolio” and “Maximize Your Fund Returns,” for $49.95 instead of the usual price of $60.00 by visiting http://www.morningstar.com/cover/Workshop.html?topnav=workshop Scroll to the bottom of the page.

The letters from the 24 winners (with minor editing) are re-printed below, along with my responses.

Gail,

Throughout the late 80s and most of the 90s I regularly invested in mutual funds. Then a member of my family committed financial fraud and identity theft in my name and successfully liquidated my mutual funds, all my investments, and indebted me through other financial products to the tune of about $112K. In 2000 I was penniless.

I have used the last five years attempting to repair my credit and support my 2 teenage boys. I have not followed mutual funds for the past few years as I've only been concerned with saving some money. I'm in a position to begin investing again. I'm 40 and I have the earning power for a second chance but the mutual fund landscape has changed a lot in the past few years and I feel way behind. If you choose me to receive the book(s) I would use them to select the mix of funds that will be most suitable for me.

Thanks

Ed

Dear Ed,

I’m so very sorry to hear about what happened. Identity theft is a terrible violation. When it is perpetrated by someone you know and trust, you also feel betrayed. You’ll be getting the mutual fund book, plus “50 Ways to Protect Your Identity and Your Credit” by Steve Weisman. Congratulations on restoring your financial reputation.

Best wishes,

Gail

Gail,

I’m 50 now and I have to work a ton of overtime to maintain the life style we both like. Looking forward to the future, I’m not as optimistic about my retirement prospects as I would like to be at this point in my life, even though I know that I am in better shape than many of my co-workers. I take advantage of my employers 401(k) match fully and I put extra into my rainy day (emergency cash) fund, too.

While I would like to have the mutual fund book to make sure that I am on the best possible course to obtain a reasonable and comfortable retirement goal, I really would like to share the information with my coworkers. Most of them have no idea how to invest at all. Their solutions tend to be some wild get-rich-quick pyramid schemes. They don’t understand that it just might be better to put aside $50 a week.

Thanks,

James

Dear James —

Something you clearly understand, and your coworkers don’t, is that if you invested $50 a week for 20 years in an investment that earned 8 percent annually, you’d end up with more than $128,000. That’s the power of compounding!

I hope you can convince your colleagues,

Gail

Dear Gail,

I'm interested in a copy of "Find the Right Mutual Funds" because I am looking to start investing. I recently got married, and much of the advice I've gotten regarding money has been how to spend it and how to argue about it.

My husband and I have talked about investing, but since I handle most of the finances, he's left the decision-making up to me. I really have no idea where to begin. I talked to a banker, who introduced me to mutual funds, but I haven't invested in any yet because I'm still nervous about it. I'm hoping that reading up on the subject will help me decide if mutual funds are right for me.

Sincerely,

Ryan

Dear Ryan —

Studies indicate couples argue more about money than anything else, but it doesn’t have to be that way. I think it’s a BIG mistake for one spouse to take on all of the financial decision-making. This is a partnership, after all!

If you accept all of the responsibility for choosing the investments, you will get all of the blame if one of them turns out to be a disappointment. At the very least, perhaps you can investigate different investment possibilities and then discuss them with your husband so that together you can decide which ones to invest in. Periodically — say, when you get your statements at the end of each quarter, or semi-annually — you should sit down and go over them together. This doesn’t have to take hours. It can be a 15-minute session. But both of you need to be a part of this process.

It’s important that this be a shared responsibility for another reason: what if something happened and you could no longer manage your investments? Wouldn’t it be better if your husband were familiar with what the two of you own, why you own it, and who your advisor is?

Trust me on this. It’s much easier to come to this understanding now, when your marriage is new, than to try to change old habits after 15 or 20 years. Maybe you can both read the book — or at least parts of it — and use it to start a discussion.

Take care,

Gail

Hi Gail,

My reasons for wanting this book aren’t “exotic”. It basically comes down to that I have no clue whatsoever on what mutual funds to invest in and why. I do have a 401(k) at work that I invest in according to what looks best at the time. I know I can’t go by historical performance but what other guide is there? The other investment account I have is all stocks. I watch what so-called “experts” recommend on TV, but let’s say that I haven’t done too well with buying into their recommendations over the years. So I would love to diversify into good mutual funds but I just need some direction.

Best regards,

Winnie

Dear Winnie —

Your letter makes me wince! What everyone who watches or listens to financial programs needs to understand is that the individuals talking about specific stocks or other securities don’t know you. They have no idea what your personal situation is — your investment experience, the other investments you own, your time horizon, risk tolerance, etc., etc.

Just because someone on TV seems to like a particular stock, that doesn’t mean it’s right for you. Besides, for every analyst who is bullish on a stock, you can probably find one who thinks it’s a terrible investment! Take the information you hear and read about as a starting point. You — or your financial advisor — then need to investigate further to determine whether it makes sense for you.

It certainly sounds as if mutual funds would save you a lot of pain. With a mutual fund, you’ve got a team of experts sifting through the “noise” to pick out the investments that make the most sense for the goals of their fund.

Please read this book and take its lessons to heart,

Gail

Ma’am,

I am another one of the military folks writing for help. I’ve put money into mutual funds for over twelve years; however, I believe I have put too little in and failed to diversify enough. I know enough to have made some decent investments in mutual funds in the past, but I lack the knowledge to be truly successful. Example: I’m not sure if diversification means selling off funds I currently own or just changing allocations of my current/future investments.

I hope to retire from the Army in four years and then start another career, but with two children (7 and 4) I must be financially secure enough to find a job I like versus a job I need. I hope the book will help me straighten out my family’s current portfolio of too many funds — 8 regular, 5 IRAs, two 529 plans (one for each kid), and my Thrift Savings Plan account — that I’ve bought and held for way too long. Perhaps the book can assist me in deciding which funds I should pare out.

Leo

Dear Leo —

A “diversified” portfolio is one that is divided up among different types of asset classes such as large company stocks, medium-size company stocks, small company stocks, U.S. government bonds, corporate bonds, real estate, natural resources, and cash (money market funds, bank accounts). You can divide things up further, but those are pretty much the basics.

I think what you’re struggling with is what percentage to put into each of these categories. That’s known as your “asset allocation.” A basic rule of thumb is that the longer your time horizon, i.e. the more time you’ve got before you’re going to need the money, the more you can allocate to “riskier” investments such as stocks. Stocks are considered riskier because their prices – especially those of small companies — tend to fluctuate more than the prices of other securities. The payback for accepting this higher risk is the potential for a bigger return than other investments, such as bonds, historically have offered.

The “art” of crafting a portfolio is to design one that gives you the best return possible for a particular level of risk. There’s no magic formula.

For instance, since your children are young and won’t need their college money for 11-14 years, you might consider investing most or all of their 529 account money in stocks, with the bulk of that going into a mutual fund that invests in high quality large company stocks. As they get into their teenage years, you would begin to pare back the total amount invested in stocks and move that money into, say, an intermediate term bond fund within the 529 plan.

But a simple solution for both your own retirement account and your children’s college funds would be to invest them in “asset allocation” mutual funds.

A number of mutual fund families offer funds that are “targeted” for certain retirement years. All you have to do is pick the year in which you plan to retire: the investment mix in the funds is automatically adjusted based on this, becoming more heavily weighted toward bonds as you age.

A similar process occurs with asset allocation funds within a 529 plan (not all 529s offer this type of fund, so you might have to look around to find one that does). When the beneficiary of the account is young, most of the money is invested in stocks. However, as the child gets older, a greater percentage is shifted into more stable investments so that, by the time he/she is ready for college, most of the account is in cash or short-term bonds.

Hey, not everyone wants to – or should! — manage his/her own portfolio. Asset allocation funds let you put much of the investing process on automatic pilot. They relieve you of the work and worry of trying to do this on your own.

Life’s too short. Think it over,

Gail

Hi, Gail –

I enjoy reading your column. I noticed in the text that you wrote:

“Based on how much you’re saving and how you’re investing it, you can test to see if you will have the next egg you’re planning to have by the time you retire. If not, you need to make adjustments.”

I boldened the word "next" as I believe that you mean "nest" egg. This is a great lead-in as to why I believe my wife and I need this mutual fund book. We had a child together (courtesy in part to an egg) and may have another child in the near future. It is difficult to save for our child's college and our own retirement at the same time when we both have a modest income. So, if our "next egg" comes along, we sure could use some good financial investment advice.

Thanks again!

Greg

Dear Greg —

Good catch! You get the prize for creativity. (Have you ever thought of becoming a copy editor?)

My best wishes for both your neSt and your neXt eggs!

Gail

Hi, Gail,

I am 46 and have dallied in both the stock and mutual fund markets. Every time I bought an individual stock, I lost. As a result, I now only invest in mutual funds.

Unfortunately, I am spread all over the map in terms of type and number of funds. I am currently invested in 14 different funds — with widely different rates of return, objectives, sectors, etc. In short, I am not sure that what I am doing even makes any sense in the long run. I am hoping that this book will help me sort through all of this…

William

Dear William,

Fourteen funds is way too many for the average person! I’m sure this book will help you simplify your life... and improve your returns.

Enjoy,

Gail

Gail —

I retired in February. I received a buyout and had a tax-sheltered annuity plan. I invested both of these into something called a “growth” fund, an “income” fund and a “capital income” builder. I really need to know what I’m invested in.

Thanks,

Nancy

Dear Nancy —

You certainly do need to know what your retirement money is invested in! FYI, the word ”growth” is a kind of short-hand code for “growth in value” or “appreciation.” This generally means the investment includes some or all stocks. Stocks don’t tend to pay much income; people invest in them because they expect them to go up, i.e. “grow” in value.

The word “income” implies that the investment includes things that throw off current income such as bonds that pay interest or dividend-paying common and preferred stocks.

The phrase “capital income builder” sounds more like something some marketing department dreamed up. In other words, it’s probably specific to that particular mutual fund and isn’t a term commonly used to describe funds in general. You’ll need to refer to the prospectus for this mutual fund to find out what it invests in. You can also visit http://www.morningstar.com to find out more about an individual fund. But you’ll need to know the exact name, including the fund “family.”

Frankly, just based on the names of these three funds, it sounds as if you’ve got some overlap. You don’t get diversification by owning more funds, you get diversification from owning different types of funds.

Provided these are still in some sort of tax-sheltered plan, such as an IRA, you can change how they’re invested without any tax consequences. You might want to get some advice from a financial planner. If you expect this money to provide you with income for the rest of your life, you’ll want to be sure it’s invested properly.

All the best,

Gail

Gail,

Over the last several years we have not managed our limited income (about $60K annually) well. I am a full-time church choir director and my husband is a pastor. We too often chose to pay for medical expenses and other necessities with credit cards when income was short. Thankfully, our house is paid for and so we are in the process of taking out an equity loan, paying off our debt, and cutting up credit cards (going from 25 percent interest to 5 percent will be a HUGE help).

I have an IRA and my church matches 50 percent of my contributions. My husband has no retirement plan AND we have just begun 529s for our kids (ages 13 and 7). What little bit we will have left over, we would like to invest for retirement, plus short-term things like home repairs/improvements, "rainy day" expenses, and vacations so we don't get back in the credit card MESS again.

Thanks for your help!

Mary

Dear Mary —

The one piece of advice I have is that before you commit to any investments, you and your husband need to establish an emergency fund that would cover 3-6 month’s worth of living expenses. This is because unexpected bills can quickly de-rail the best-intentioned investment plan.

Only after you have these funds set aside — in a savings or checking or money market account- should you start investing for your own retirement or your children’s college educations. I’m concerned that if you don’t have this “cushion” you will fall back on credit cards again and get back into the same situation... only this time around your house will have a mortgage. Which means if you fall behind in your payments, you could lose your home.

Take it slowly. Don’t try to do it all at once.

Gail

Gail,

I have held onto the same two mutual funds since the early 90's and have made little effort evaluate their performance or look for better opportunities. I have finally landed a job with long-term prospects and would like to start an aggressive savings/investment plan above my employer-sponsored retirement plant.

My first impulse was to just start dumping more money into my current mutual funds, but after reading your columns I realized that I need to do some comparison shopping and develop a more comprehensive plan. Unfortunately, I have found the task somewhat overwhelming. I need a good guide to show me what to look for and how to make wise decisions concerning my money. The Morningstar book sounds like precisely the tool I need to start the process right.

Thank you,

Roger

Dear Roger —

I think this book is exactly what you need.

All the best,

Gail

Hello, Gail.

I am a volunteer with Books for Soldiers ( http://www.booksforsoldiers.com ). We send books, care packages, etc. to deployed soldiers in response to their requests. Many of the soldiers request books on investing, and the mutual fund book from Morningstar would be a great one to send. I keep track of my own portfolio using Morningstar's online tracking services, although I have devoted far less attention to my portfolio since becoming a Books for Soldiers volunteer last fall.

Patricia

Dear Patricia —

Consider it done!

Thanks for your work supporting our troops,

Gail

Hi Gail,

I am simply a young father who is making a good living and needs to learn the hows and whys of investing. I work in the automotive industry, and with all the turmoil right now I would like to retire sooner rather than later. I also have three children and have started investing for their futures also — but again, with little or no knowledge of investing am I making correct choices?

I have an IRA I set up myself and also a 401(k) through my job. My wife and I are almost debt-free (except for the house) and are really beginning to peer into our financial future to see where we need to be headed. It is hard to find time to sit in a seminar listening to someone talk about finances, but I can find plenty of time to read – and that is why I am writing.

Thank you for your column and your advice.

Bill

Dear Bill —

It sounds as if you and your wife are wisely taking advantage of as many tax-favored savings accounts as you have available. I hope you can fit this book into your list of “summer reads.”

All the best,

Gail

Gail,

I have been deployed with the military frequently since 9/11. I am currently on active duty and have used this opportunity to pay off our outstanding debt and have been saving the money that used to go towards those bills.

The problem I have is that I don't know what to do with this. I have been trying to study what I can in my limited time on the Internet and have read with interest your articles. I have a large family with five children, one of which has complicated medical issues. My first goal is to set aside an emergency fund easily accessible for the times when our daughter goes into the hospital and we have additional expenses outside of the medical ones. I would be grateful to have the opportunity to have this book.

Thank you,

Jack

Dear Jack,

Congratulations on becoming debt free!

Come home safely,

Gail

Dear Gail,

I have been trying to handle my 401(k) without really any guidance and have not noticed any substantial gain. I was not even aware that I should rebalance annually until lately. I am 54 and I have limited choices within my plan. I need to gain a better understanding of mutual funds as I try to maximize for the remainder of my career.Thanks,

Charles

Dear Charles —

This book should help you make the most of the 12 years you have before you retire.

Best wishes,

Gail

Dear Gail,

I have been in the Army for just over 19 years now and will be eligible to retire in about 2 more years. I would like to receive a free copy of Morningstar’s Find the Right Mutual Fund for my wife and myself. We’re both in our late 30s and are at odds as to how much we should have in cold, hard cash and how much we should have invested in our mutual funds and my Thrift Savings Plan.

Unfortunately I am not at home now for the two of us to have an intelligent conversation about this. I am currently 5 months into my Iraq deployment. If I’m chosen, please send the book to my wife, Brenda.

Thanks,

Chuck

Dear Chuck,

A book is on its way to Brenda. Come home safe and sound so the two of you can discuss this… and a lot more!

Gail

Dear Gail,

My husband and I would love a copy of the book “Find the Right Mutual Funds”. We have been in the Air Force for 23 years and I have been a stay-at-home mom. My husband is planning on staying in the Air Force for at least two more years until our youngest daughter graduates from high school. We also have one son who is 20 and one more up who is 9. My husband is also finishing his degree and will become a high school math teacher when he retires from the USAF.

We have never been in position financially before to save and feel now we can swing it. (Although we do have college coming up for our daughter, she should be able to get some scholarships based on her academic ability.) We would also like to start a 529 plan for our youngest son so we are prepared for his college costs. We feel the book “Finding the Right Mutual Fund” will put us on the right path and help us to maximize our money in the little time we have left to save for retirement. We love all the articles you write. Please keep them coming.

Karen

Dear Karen —

Mutual funds are the perfect investment vehicle for you. Enjoy the book!

Gail

Dear Gail,

At 38 years of age I have gotten my first job with a 401(k). In thirty days I am going to be absolutely clueless as to what decisions are going to be right for me. At this late stage in life I have begun to repair my credit, raise my FICO score and try to plan for my future. If I am selected for one of the last 20 remaining copies of Morningstar’s Mutual Fund book, it will be only the second finance book on my shelf.

Regards,

John

Dear John-

Happy to contribute to your “library”!

Gail

Gail,

As a recently divorced father of three, I have found myself in a very different financial position. I am looking for all the information I can get my hands on regarding the best way to invest what I can while setting aside money for their college education.

Thanks for all the great information.

Matt

Hi, Matt —

I hope this book helps. A 529 plan or Coverdell Education Savings Account might make a lot of sense for your children’s college educations.

Gail

Hi Gail,

For the past five years, I have invested with a company that has been taking a beating in the media lately because of its affiliation with military service personnel and its heavy up-front commissions.

Gail, I need help! After 5 years of investing, my planner informed me recently that I had finally achieved "a balance that was higher than the total amount I had invested." I listened to his advice to wait, hang in there, etc.

I've decided it is time for me to branch out on my own and your offer for the Morningstar investor handbook will be very helpful to me.

Thank you,

Elizabeth

Dear Elizabeth —

I know exactly what you’re referring to. I think you’ll get a lot out of this book.

You can do it!

Gail

Dear Gail,

I am 37 years old, married, with four beautiful children. I am concerned about the outlook of social security and whether I will have any thing when I retire. I am now in a job that has allowed me to start saving some income. My company provides a 401(k) for investing but I do not understand all of the terminology.

I know very little about investing but wish to learn and start. I am not sure exactly how they system works and what are the real risks?

I would use the free book to start learning about 401(k)'s and what type of investing that I should be doing.

My hope and desire is to be able to maintain my current status of living with the expectation that I will have my house mortgage paid off about the time that I retire.

Sincerely,

Tad

Dear Tad —

Mutual funds are inherently less risky than owning individual securities because they are, by definition, diversified. That is, they own a lot of different stocks or bonds, depending upon the type of fund. This book will help you understand how they work and the benefits they offer.

Be glad your employer offers a 401(k). If your company “matches” your contribution to the plan, you should contribute whatever amount you have to in order to qualify for the maximum match. Failing to take advantage of this is like leaving money on the table.

All the best,

Gail

Hi Gail,

Thanks for educating people on investments. I think you help a lot of us realize that we must take control of our money and financial destiny. The Mutual Fund book would benefit me as I have funds in both my Roth IRA and 401K accounts. Knowledge is the key to making good decisions. I am trying to save 20 percent of my income in my retirement plans, as I am a single woman with only my income. Having the savings goal really helped me to achieve it.

Thanks again!

Jeannette

Dear Jeannette —

I‘m impressed at your savings rate! As a single woman, you have no “back-up” in the event of a financial setback, such as being disabled or laid off. You’re also much more vulnerable in retirement. I’m proud of you for taking matters into your own control. You’re absolutely right: once you have a clear-cut goal, it makes saving much more concrete and, amazingly, easier.

You go, girl!

Gail

Hi Gail,I have some investments in mutual funds that are ok, but the selection criteria I used were certainly not based upon much that was reasonable. I am 62, have a fair amount saved, but would like to move more toward mutual funds. I do not want to pick them as I have in the past. I could use information on how to do a better job of finding suitable funds for the end game. The volatility of the market in general makes me a bit nervous now.

Thanks!

John

Dear John —

I think this book is just what you need.

Happy reading!

Gail

Dear Gail —

My wife and I are mid-30's professionals who finished our educations and started our careers before starting our family. With student loans, a 3-year-old and 6-month-old (don't worry — already started the 529 for the 3-yr and have the paperwork for the 6-mo), and the financial needs/wants of life, believe me, we would put this book to good use.

While we contribute to our 403(b) and 401(k) respectively, and thought we were fairly smart about saving/investing, we have to confess we really didn't know our true investment "picture." We've already been through 2 investment advisors — one was terrible and the other just didn’t follow through. That's why we're hoping we get this book. Your "housekeeping" article prompted us to think about finally taking better control of our savings/investing so we can make more informed decisions on our own.

Respectfully,

Steve

Dear Steve —

Way to go, dad! It’s awesome that you’ve already got 529 plans for each of your children.

Think of this as some “bedtime” reading for mom and dad,

Gail

Hello Gail,

I am a 37-year-old Navy Officer with a wife, two kids, two dogs, minivan, etc. Along with this comes the ultimate responsibility to take care of our future by making smart decisions now.

However, how do you make those decisions with limited knowledge? I struggle with all the second thoughts that arrive with every quarterly statement. I want to know that I am on the right course. But I do not even know how I would move between funds, when to move between funds, how to not make a critical mistake, and so on. It is tough.

Therefore, I would like to try to get the book you are offering and the increased peace of mind that will come with it.

Thank you and keep up the good advice,

Jim

Hi, Jim —

The book’s on its way. But please do yourself a favor and consider asset allocation funds for at least part of your portfolio. They’d really take a lot of stress out of your life. I explain them in my answer to “Leo.”

Gail

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