In days of yore, a retirement consisted of calling youngins whippersnappers and trying not to crap your pants in public. That was about it. These days, with the decline of social security as a guaranteed means of retirement and the fact that medical science has rendered old people practically bionic, retirement has taken on a new tone. Retirement is now about enjoying life (usually for the first time since being a child), shamelessly taking Viagra and flaunting a growing interest in Republican policy. Given this, it helps to have a solid investment plan and one way to accomplish that is through mutual funds. While I have my reservations about mutual funds, the fact remains that they are widely available, diverse, and easier to get into than Selena Gomez.
What follows are five ways to find a great mutual fund:
1) Choose an economic segment you are familiar with. This tidbit of advice was made famous my Peter Lynch, who ran the Fidelity Magellan Fund from 1977 to 1990 with an average return of 29%. Don’t get too excited, if everyone could follow this advice and achieve that type of return milk would cost $500 a gallon and I would have to take out a bank loan to go to a strip club. Peter Lynch’s point is that an investor has a better probability of achieving success if their investment portfolio is controlled by forces they understand, and this is a foundational quality to any investment success.
2) Examine the fee structure of the mutual fund. Mutual funds are not required to keep fees flat or low, and can change them at any time. High fees are meant to pay those fine folks in the fund that work hard at managing the fund’s investments, work that usually ends at 3pm. The typical advice is to stay away from high-fee funds, but that is a decision that falls on you—in certain instances a high fee fund will outperform low fee funds significantly. Other (most) times they perform no better, or their modest superiority is eroded by “fee creep”, meaning the fees wipe out any incremental return over low fee competition. Ensure fees have stayed flat, or risen modestly versus the wider mutual fund market.
3) Change in management. As in the Fidelity Magellan Fund’s case, its manager was the sole reason its performance made its competition look like pee wee hockey matched against the Red Wings. While you don’t have to higher Phillip Marlow, PI to investigate the current fund manager it helps to take a look at their investment history. You want a solid track record of success in several market conditions, not just a recent bull market that third graders could have made money in. Also, don’t get swung by Ivy-league degrees or other credentials unrelated to investment performance. Dumb people get in smart places all the time.
4) Examine the mutual funds holdings. In English, this means look at what the mutual fund actually owns and how this portfolio changes over time. If you are investing in a fund specializing in growth and you see a new, large position in a tech fad company take notice. Call your broker (or the fund company itself) and ask what is going on. Most mutual fund investors buy into several funds to create a “balanced” portfolio. A fund that changes its strategy may screw up yours.
5) Change in performance. Evaluating performance is trickier than hitting on a transvestite, so be sure to hold the above four points in mind before beginning any performance based evaluation. Remember why you invested in the first place—was it long term growth? If so, a temporary under performance versus other funds may be the price you pay for a long term orientation. Did you invest in an Asian-market specific fund because you think we will all be speaking Cantonese in ten years and worshiping Jackie Chan? If that is the case, ask yourself if anything truly changed in China’s economic prospects, or something else is just having a good year. Tip: if you see the longer term performance rates lagging, such as the five year average return, you may want to look at other fund options.
Mutual funds are a great way to begin investing but have their pitfalls. Still, for most investors they are the chosen path towards a secure retirement filled with grandchild directed debasement. The above five methods towards choosing and monitoring mutual funds should help you find the right fund for your goals, be they a modest apartment or a mansion on Mars.
What methods do you use to evaluate mutual funds?
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