A recent backyard gathering sparked all sorts of debates with my neighbor. Over a couple of rather unhealthy plates of barbecue, we got to chatting about everything from parenting to Social Security to immigration to financial independence.
Funds, not stocks
Many times I've tried to persuade my neighbor, a well-established design engineer for a major defense contractor, to try stock investing. He simply won't do it. He's convinced that he has neither the time nor the talent to pick securities on his own.
I'll admit that, at first, I thought he was being unreasonably gun-shy. After all, he's well-versed in the nuances of the aerospace and defense industry and he's excellent at math. But then I realized that his resistance isn't really about time or talent; it's about comfort. For him, picking stocks is stressful, and he has enough to worry about.
That's why funds are a better choice for him. As we talked about financial independence, he wondered whether his fund portfolio strategy was helping him to get ahead. I wondered, too.
Five minutes to find a contender
So, Fool that I am, I persuaded him to leave the party and head to the basement where the computers are. Once there, I asked whether we could run a five-minute test on the funds he owns. He agreed, and I pointed my browser toward Yahoo! Finance.
We began with his largest holding: Vanguard Windsor
Fund style: A style tells you what kind of investments the fund makes and why. For Windsor, it's large-cap value stocks. This means that the fund tends to invest in blue chips trading at reasonable valuations. Current top holdings include Pfizer
(NYSE: PFE), Wells Fargo (NYSE: WFC), ACE Ltd. (NYSE: ACE), and Delta Air Lines (NYSE: DAL).
- Low fees: Windsor scores well here, too. Its 0.33% expense ratio means investors will pay only $3.30 annually for every $1,000 they have invested in the fund. It's also a full percentage less than the category average.
- A tenured manager: For Windsor, the lead manager is David Yuen, however, most of the fund is managed by Jim Mordy, who has spent more than two decades at Wellington Management, which manages two-thirds of Windsor’s assets.
- Superior long-term performance: Windsor has outperformed the S&P 500 in seven of the past 10 years, and so far this year. For the trailing 15-year returns, it has beaten the S&P 500 and two-thirds of other large-cap value funds.
Time to take inventory
So far, so good, but there were plenty more funds to do. As we researched further, I found that many of my neighbor's funds sported unreasonable front-end loads. For example, he owns American Funds New Perspective (CNPAX), which owns some interesting stocks such as Google
All told, we spent about a half-hour researching specific funds. I then asked my neighbor three more questions, all of which I believe are just as relevant for any fund investor:
- Is your portfolio balanced? My neighbor's is. He has a wide selection of value, growth, and foreign funds in his portfolio. You can find out how you rank by checking the fund style for every position you own. Do you have multiple funds of the same style? If so, why?
- Are your returns worth the price? Here's where my neighbor's portfolio breaks down. While there are superior funds that charge loads, there are many excellent choices that don't. Paying loads just doesn't make sense for most investors.
- Do your managers inspire confidence? Tenured managers run many of my neighbor's funds. That's a good sign, particularly managers with a long history of market-beating returns.
Two out of three is pretty solid, but, as my neighbor says, it should be easy to go three for three, especially since his employer offers a variety of fund choices.
The Foolish bottom line
More and more, I believe fund investors, especially those participating within the confines of a 401(k), tend to "buy and forget" about the portfolio they've created. That's a mistake that can prove costly over time.
Fortunately, giving your fund portfolio a checkup isn't likely to take more than 30 minutes. Just follow the steps I've outlined above. But if you’d like someone to help you analyze your funds – as my neighbor did, but someone even better than me -- check out the fee-only advisors in the Garrett Planning Network. You pay them by the hour or by the project, not by the commission. So you know you’re getting their independent, objective advice, and not advice influenced by the desire to generate a sale. For a limited time, many Garrett advisors are offering Motley Fool readers a 10% discount. Just click on your state on the Locate an Advisor map, and look for the Fool logo for participating advisors.