11/4/2009 9:00 AM ET|
How to invest $1,000 right now
To find those long-term outperformers, I require that passing funds must have recorded average annual returns at least equal to the Standard & Poor's 500 Index ($INX) over the past one, three and five years.
Screening parameter: 1-year return greater than or equal to S & P 500.
Screening parameter: 3-year return greater than or equal to S & P 500.
Screening parameter: 5-year return greater than or equal to S & P 500.
It's about more than returns
Whether you're talking about individual stocks or mutual funds, many analysts consider risk-adjusted return -- which compares historical returns with historical volatility -- to be more significant than returns alone.
Morningstar uses its own proprietary version of risk-adjusted return to rate all funds with at least a three-year history from one to five stars, with five being best. Funds with the highest risk-adjusted return within the same category -- for example, small-cap growth and technology -- get the highest ratings.
There's no guarantee that a five-star fund will continue to outperform lower-rated funds, but in my experience it's a good place to start. I've had the best results sticking with five-star funds, but consider adding four-star funds to the screen if you want to see more funds.
Screening parameter: Morningstar star rating = five stars.
Though Morningstar's star ratings consider volatility, a high-volatility fund can still gain a high star rating if its returns are high enough. So to minimize risk, you need to consider volatility by itself.
Morningstar's risk rating compares each fund's historical volatility to that of other funds in its category. The possible ratings are high, above average, average, below average and low. While the lower the better, low-rated funds generally don't produce market-beating returns. So I accept both low and below-average ratings.
Screening parameter: Morningstar risk better than or equal to below average.
Avoid new managers
The historical risk-and-return figures are meaningless if the fund manager responsible for those results has jumped ship. Because I base my analysis on five-year returns, it makes sense to require that managers have been on board for that time.
Screening parameter: Manager tenure greater than or equal to five years.
Watch those expenses
The expense ratio is the percentage of a fund's assets that goes to pay a fund's operating expenses, such as salaries, office rents and marketing. The expense ratio directly subtracts from your returns.
For example, say two funds each earned a 15% return on their investments last year. Fund A's expense ratio was 0.5%, while Fund B's ratio was 2.0%. Fund A's shareholders enjoyed a 14.5% return for the year, while Fund B's shareholders netted only 13%.
While some expense ratios are as high as 2.5%, you should be able to find a good selection of funds with ratios below 1.5%, and that's where I set my limit. The next lower expense ratio selection available on Morningstar's screener is 1.0%, and not many funds would meet that requirement.
Screening parameter: Expense ratio less than or equal to 1.5%.
Sorting through the list
Click "show results" to see the list of qualifying funds. When I ran the screen, the screener listed 45 funds. However, many are available only through financial advisers or corporate retirement plans. To screen those out, click on a fund name to display the fund report and then navigate to the purchase report, which lists brokers handling that fund. If your broker isn't listed, the fund probably isn't available to individual investors. In the end, I came up with only five widely available domestic stock funds:
|Name||Minimum initial investment|
|Amana Trust Growth (AMAGX)||$250|
|Amana Trust Income (AMANX)||$250|
|FMI Provident Trust Strategy (FMIRX)||$1,000|
|Gabelli Small Cap Growth (GABSX)||$1,000|
|Neuberger Berman Genesis (NBGNX)||$1,000|
When I changed the "fund group" selection to "international stock," my screen listed 21 funds, but only four appeared to be available via online discount brokers:
|Name||Minimum initial investment|
|Artisan International Value (ARTKX)||$1,000|
|Mutual Quest Z (MQIFX)||$1,000|
|Scout International (UMBWX)||$1,000|
|Sextent International (SSIFX)||$1,000|
You can use MSN Money's top 25 holdings, report to see the number of stocks in any fund's portfolio, as well as the list of top 25 stocks by percentage of the fund's assets. Funds holding 100 or more stocks are generally less volatile than those holding fewer stocks. Also, by examining the top 25 stocks, you can see whether the fund is betting on a particular sector or industry.
Pay attention to the standard-deviation figure listed both on the screen results and in the portfolio report on MSN Money. Generally, when you're comparing two funds, the one with the lower standard deviation is safer.
The portfolio report also shows the fund's weighting in terms of industry sectors. Funds with heavy weightings in a currently hot sector are riskier bets than more diversified funds. The portfolio report also shows the asset allocation among stocks, bonds and cash.
Funds holding 10% to 20% bonds are usually less volatile than funds with no bonds. However, they typically produce lower returns in strong markets.
Check each fund's returns for individual calendar years on MSN Money's returns report, and avoid funds that racked up losses in years when the market was strong.
Take time to review all of the available information for each fund. The more you know about your funds, the better your results.
At the time of publication, Harry Domash did not own shares of any mutual fund mentioned in this column.
VIDEO ON MSN MONEY
If youre that worried about $1,000 odds are you shouldnt be investing. Puting it into a mutual fund is about as useless as keeping it in a regular savings account.
Like everyone if you invest money you are looking to make it rich so STAY AWAY FROM THE BIG COMPANIES. If you think you are gonna get rich buying Disney stock at $36 I want to sell you some swamp land in Arizona. Same for Google, Apple, IBM. Your best chance of buying a stock that will double in less than 5 years? Home builders. The greatest part about a homebuilder stock is not only have they #1 lasted through the housing bottom, but #2 they are starting to make money again, and #3 when the market turns around imagine how much their stocks will go up. $5 a share for Standard pacific right now has a better chance to hit $15 (triple in value) in 5 years and probably will in 10 years for sure over say Disney hitting $108 (tripling in value) in that same time frame.
It is a bigger rush seeing a stock jump 10% or more in price occasionally than it is to see mutual fund prices go up or down a few cents, so maybe an account at Etrade and a few hundred on a $5 stock like Citygroup would spur interest if you need a little more than the funds alone.
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