7/28/2014 2:45 PM ET|
7 steps to pick the right mutual fund
While the industry has changed dramatically over the years, the process of choosing a good investment fund hasn't.
Twenty years ago this month, I began writing a weekly column on mutual fund investing for the Boston Globe; one of my first pieces was on how I pick funds for my own portfolio.
Asked recently by a colleague if I remembered my first columns, I went back for a look-see.
My process has remained the same over the last two decades, but the fund industry has changed dramatically, so I've refined my methods along the way.
Because long-term happiness with a fund is often traced back to what the buyer was thinking at the time of purchase, it's imperative for investors to have a personal selection system. With that in mind, I'm sharing my updated process, in the hope that it helps you develop your own, making you more comfortable with what's in your portfolio.
Here is how my system works today.
Step 1: Determine why I want or need a new fund
Investing isn't my hobby, it's a means to a better future; thus, I avoid impulse buys, superhot funds and moves that don't fit a bigger strategy. I want a small, manageable fund portfolio, filled with high-conviction choices; I'm not adding investments just for the sake of saying I own something new.
Fund selection starts with deciding what I want the purchase to accomplish, whether it's diversification, growth, stability, income or something else; focusing on the reason for a new fund lets me properly set expectations.
Step 2: Find the mutual funds or ETFs that meet my needs
After finding the right asset class, look for issues that meet your key criteria.
I want below-average costs -- or a darned good reason to pay more -- and prefer managers with a track record of at least a decade. I avoid sales charges, not because load funds are bad but because they're not for someone like me who does significant personal research and doesn't pay an adviser for help.
I don't waste time with funds that have a minimum account size beyond my means (unless they waive it for regular deposits), or with ETFs with less than $50 million in assets (too big a chance they will fold).
Step 3: Learn the story of the fund
I want the basis for trust and confidence, whether it's the manager's expertise or the common-sense simplicity of indexing.
In searching for compelling reasons to buy a fund, examine a fund's newsletters and reports. You learn a lot about managers by reading what they tell shareholders and prospective investors.
This is also where I factor the firm into play if a company has earned investor trust; if there's something scary in the past -- an oversize implosion during the 2008 financial crisis, for example, or a history of playing outside the rules of its prospectus -- move on.
By the end of this step, you should know a fund well enough to justify its place in the portfolio. If you can't support your selection now -- if you couldn't explain it to your spouse or kids and have it sound like savvy thinking -- you won't be able to stick by it when the market gets tricky.
Step 4: Compare the fund to its peers, then check returns
People who make returns their first criteria wind up chasing hot numbers, leading to unbalanced portfolios filled with yesterday's winners. But picking a fund more for asset class than raw performance makes comparison-shopping within the category essential.
My initial cut has always been for funds in the top 25 percent of their peer group over the last five years, but right now I'd extend that to a decade because the shorter time frame excludes any big downturns. I'm looking for consistency, and I'll sacrifice some upside potential for the promise of a smoother ride.
Step 5: Choose the finalists, read the prospectuses, check with the analysts
I'm looking for holdings that are consistent with a manager's discipline; examine what a fund is allowed to invest in, which is key to how the portfolio could change over time.
If a fund's ratings from firms like Morningstar, Lipper, New Constructs or others make me question my analysis, I'm moving on. I don't let ratings determine which funds I consider, but I want confirmation of my gut feelings and I'm careful when betting against those experts.
Step 6: Check under the hood
This is where the shortlist gets weeded to my pick. Lower costs, better tax efficiency (unless the fund is in an IRA) and less overlap with my current holdings tend to be my key tiebreakers.
Step 7: Pick my winner, jot down my thinking and make the purchase
My file on any new fund starts with a detailed list of factors that led to my decision, making it easier years from now to answer the question "Would I buy it again today?"
If I'm not nervously excited by the potential of my pick, something is wrong. Without that rush, I'd refine the search, start over and keep looking until I find something I believe in.
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VIDEO ON MSN MONEY
Obama just told Putin to invade and take Ukraine.
You say, No?
Obama said we would not do anything militarily!!!! Ok, even if you don't intend to do anything militarily, why would you tell Putin that. STUPID? INEPT? Or just plain Obama's desire to knock the U.S. down a few more pegs? Probably all of the above.
This guy is a disaster. We could have shown Putin we are a serious nation and not bowed to Putin by agreeing to not deploy our anti-missle defense in Poland. We could have shown Putin we are a serious nation by supporting Ukraine's desire to join NATO? But kiss but, bend over ..... Neither of these items would have involved military action, but would have said we have Balls.
When Ukraine started to have internal troubles we could have sent, innocently, military aid to Ukraine. Not a military action at all, but a friendly move to support a sovergn country and sent a MESSEGE to Putin that if he acts on the Utraine it will cost him and put doubt in his mind as to what the U.S. might do.
Is there any doubt that Obama will just plain sit back and let Iran get nuclear weapons? Do you think Iran questions it?
Why are the Chinese doing barrel rolls over gutless American Military planes in the Pacific? Why are the Chiness making claims for islands owned by Japan? Because Obama is a strong and decesive leader?
You avoid mutual funds like you try to avoid the plague!!!
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