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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: VWNDX  ) . I was looking for four things:

  • 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 (Nasdaq: GOOG  ) and Newmont Mining (NYSE: NEM  ) , but charges 5.75% upfront to get invested, and then adds 0.20% in 12b-1 marketing fees to its otherwise respectable 0.88% expense ratio. Those latter expenses have increased over the past few years. Not so good.

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:

  1. 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?
  2. 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.
  3. 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.

This article originally ran July 7, 2006. It has been updated by Robert Brokamp.

Fool contributor Tim Beyersis a member of the Rule Breakers stock-picking team. He had stock and options positions in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Pfizer is a Motley Fool Inside Value selection. Google is a Motley Fool Rule Breakers pick. The Fool's disclosure policyis, dare I say it, en fuego.

Read/Post Comments (1) | Recommend This Article (12)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 26, 2010, at 7:09 PM, kgeechee wrote:

    Something is just not right with your friend's portfolio description. If he was working with an advisor, he seems to have gotten good advice for his front end load. He could have opted for 'B' shares, that just spreads the load and is no savings in the long run.

    Do you advise inverstors to run to 'hot' new funds each year? I would hope not.

    If he was working alone, why start with Vanguard and then switch to Load funds?

    Having paid the front-end load, would you advise him to sell his "good" funds and start over with "no-load" funds? I would hope not.

    Vanguard may be close, but no fund is a "free" fund. The fund manager has to be paid each year that he works for you; his associates, his computer staff, his sales budget. No new money means a dead fund sooner or later as clients leave or die.

    Funds are fine for some, but will not hit the highs or the lows. If they bought Apple, they also bought 399 other stocks that did not match that stock. Just nature of the Beast. However, he does not have to worry as much as some (ME!) that his widow will be broken hearted after she finds that I slaved over this computer for years and left her enough to make a wonderful trip to Paris and return to file Chapter 10. She gets to keep the house and the car; she just cannot pay for them or heat or gas or food. The little things. At least she had Paris!

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