Before we start to segregate each of the four funds that Dave Ramsey recommends, we need to review a few important terms.
An investment where people collectively pool their money together to invest in securities such as stocks and bonds. These funds are managed by professional money managers who allocate the funds’ assets and attempt to increase the funds within the investment.
This is the size of the company your mutual fund or you individually might be investing. This size is determined by taking the total number of outstanding shares of stock times the current stock price. For example, if a company had 20 million shares outstanding for $50 per share it would have a market capitalization of $1 billion. The worlds largest company today, in regards to market capitalization is Apple, with a market cap near $3 trillion.
Growth
In the investment world, these are Large Cap Growth Funds. Companies within this type of fund have a market capitalization value of more than $10 Billion. Common characteristics of companies within this type of fund are: 1. Transparency of the company; the financial situation of the company is generally made public and easy to find. 2. Stable; generally, these companies are seen as stable and do not typically offer the same level of growth that smaller companies can potentially provide. 3. These companies usually do not offer Dividends and instead, they reinvest their growth back into the company to help develop and expand the services. A common index benchmark for Large Cap Growth Funds is the Russell 1000 Growth.
Growth and Income
In the Investment world, Growth and Income are Large Cap Value Funds. These are large stable companies that instead of reinvesting their growth, they will offer investors dividends. These are slow growing companies, who supplement that slower growth with a share of their profits, hence the dividend and whose market capitalization are $10 Billion or more. A common index benchmark for Large Cap Value is the Russell 1000 Value.
Aggressive Growth
In the investment world, these are Mid and Small Cap Funds.
Companies within the Mid Cap Fund have market capitalization of $2-$10 billion. Mid Cap companies usually offer investors greater growth potential than large cap funds, and have less volatility than small cap funds. A common benchmark for companies within the Mid Cap Fund space is the S&P 400.
Additionally Mid Cap Funds can be classified into two subcategories. Mid Cap Growth and Mid Cap Value. As discussed above with large cap funds, Mid Cap Growth Funds will be investing in stocks whom are faster growing companies with a market capitalization between $2-$10 billion. Mid Cap Value Funds will be investing in stocks of companies whom are slower growing typically, but are sharing their profits with you the investor through a dividend, in that same market capitalization space of $2-$10 billion.
Companies within the Small Cap Fund have market capitalization of $300 million - $2 billion. These funds are looking for young companies or companies that are rapidly growing. Small Cap companies offer investors good growth potential; however, it offers more volatility than mid and large cap companies. A common benchmark for companies within the Small Cap Fund is the Russell 2000.
Additionally Small Cap Funds can be classified into two subcategories. Small Cap Growth and Small Cap Value. As discussed above with Large Cap Funds, Small Cap Growth Funds will be investing in stocks whom are faster growing companies with a market capitalization between $300 million - $2 billion. Small Cap Value Funds will be investing in stocks of companies whom are slower growing typically, but are sharing their profits with you the investor through a dividend, in that same market capitalization space of $300 million - $2 billion.
International
In the investment world, these are companies that are outside of the United States. They can be grouped into two categories; developed markets and emerging markets.
Developed Markets: Companies that are located in the developed markets are generally established and highly industrialized (first-world) countries. Common non-U.S.A. developed markets are: UK, Australia, Japan and Germany. Developed markets usually have a more stable political and financial position and have easy access to your investment funds. A common benchmark used to assess the performance for funds within Developed Markets is the MSCI EAFE index.
Emerging Markets: Companies located in emerging markets are considered to be between developing and fully developed economies. These markets are usually harder to get money in and out of and can have high political volatility. Countries with emerging markets are India, Brazil, and China. A common index used to measure the performance for funds within Emerging Markets is the MSCI Emerging Markets Index.
Global Funds (World Fund): This is a fund that invests in companies locate anywhere in the world, which of course includes the United States. Global funds seek to identify the best investments across the globe. A common index used to measure the performance for funds within the Global Fund is the Vanguard Total World Stock Index Fund.
It is important when talking to your advisor, to ask why they would place you in a Global or World Fund vs. an International Fund. “Why is this a problem you ask?” Because these Global funds don’t capitalize, as effectively, on the good years for the international market. Global Funds also reduce the diversity in your portfolio as they can invest approx. 50% of the portfolio into American companies, which is actually what you are already doing in the Growth, Growth & Income and Aggressive Growth categories. If the American market has a rough year, then 87.5% of your investment portfolio is exposed to the American market, because your advisor used a global fund as opposed to a true international fund, compared to 75% as Dave Ramsey recommends.
Another misleading practice is when an advisor uses their returns on the Global Fund, and compare it against a true International Fund. They’re two completely different markets offering an unfair comparison.
To learn more about investing into the four categories of funds that Dave Ramsey recommends, please contact one of our SmartVestor Pro's today!