Sunday, November 7, 2010

How to Pick a Winning Mutual Fund

    Most investors today are passive investors that only take advantage of their employer's 401(k) or 403(b) plan.  Employer plan administrators and brokers have oversimplified how employees are choosing their retirement investment vehicles.  Some plans don't even require employees to pick mutual funds.  Many employers allow their employees to simply choose risk tolerance packages that the brokers put together.  Risk tolerance packages are a collection of assets that may include several different mutual funds or other investment vehicles.  These Packages further remove the investor from any kind of investment decision making.  Any investor that will depend on their retirement savings should be more proactive when deciding how and what to invest in.  Investors should choose their own mutual funds starting with a few basic criteria.  This basic criteria will apply to any type of mutual fund category.

  1. Invest in a no-load fund that also has low expenses (less than 0.5%)- Fees and commissions eat away at a fund's return on investment.  If there are market beating mutual funds (there are plenty) with low expenses and no commissions, why would you pay these fees?
  2. Select funds that have great long-term returns-  Mutual fund returns (just like individual stocks) can have fluctuating returns from year to year.  If you only look at what the fund has done over the last year, you aren't seeing the entire picture.  Remember, you are investing for the long haul (most likely 15-40 years before retirement) and you need proven and sustainable performance.  Ideally, look at the fund's 10 year annualized return and compare it to peers of the same category. 
  3. Look for a long term manager-  A mutual fund with a manager that has been in charge for at least 5 years is ideal.  You can't accurately predict how a fund will perform in the next few years if it has a new manager. 
     Those are the basic criteria to pick winning mutual funds.  When you are ready to pick a mutual fund, start with these criteria to get your short list.  Then select a fund based on your personal preferences:  company, category, asset allocation, etc.  You should also learn more about asset allocations before you invest in mutual funds.  Every investor will have a different risk profile that can be controlled with different asset allocations.  In summary, you should have control of your retirement nest egg, not some broker that simply put together a generic package of mutual funds.

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5 comments:

  1. Probably the biggest key is costs. Keep costs down and over time it makes a substantial difference!

    ReplyDelete
  2. Should have recommended some names. I mean managers

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  3. Hi,

    I am working on putting together an infographic on the best ways to use your tax return. Is this something that you and your readers might be interested in?

    Hope to hear back from you soon!

    Best,
    Ryan A.
    ryan.avila@drivenetwork.com

    ReplyDelete
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