Each month in the pages of Motley Fool Champion Funds, we continue our endless pursuit for world-class mutual funds, the kind of picks that even bona fide stock jocks should consider sinking a chunk of their nest egg into.
Make no mistake: Equity investing for fun and profit can certainly be an enjoyable pastime, but there are plenty of compelling reasons why more than 90 million Americans invest in mutual funds. Here are two of them:
- They have a life beyond their portfolios, and stocks-only investing is a high-maintenance proposition.
- Because of their built-in diversification, well-chosen funds can help keep the road to retirement relatively smooth.
That said, you can't just throw a dart and expect to hit a mutual fund bull's-eye. For that reason, there's a core set of criteria that I use at Champion Funds, and one of the items that appears high on my critical list is a low price tag. Counterintuitive though it may seem, when it comes to mutual funds, you usually get what you don't pay for.
Say what?
Think about it. Mutual funds aren't like toaster ovens or luxury sedans or, for that matter, any other product for which the more you pay, the more bells and whistles you get.
No, you'll receive the same basic set of money management services -- stock or bond buying and selling -- whether you surrender 2% of your assets each year to the fund's expense ratio or, as I prefer, less than 1%. And while it might seem logical to think that paying up for a fund would procure a more talented manager -- and therefore better returns -- that's simply not the case.
Not for nothing, after all, do the vast majority of actively managed funds lose out over the long haul to low-cost index trackers such as Vanguard Total Stock Market (FUND:VTSMX), Fidelity Spartan 500 Index (FUND:FSMKX), and the popular exchange-traded fund (ETF) that goes by the funky handle SPDRs (AMEX:SPY): These funds' dirt-cheap price tags give 'em a distinct advantage over pricier picks, which have a higher hurdle to clear each year just to stay even with their expense-free benchmarks.
Exceptions to the rule
To be sure, there are important exceptions to this fund-fee rule. Consider Bill Miller, manager of Legg Mason Value Trust, a large-cap fund whose relatively concentrated portfolio included the likes of Google (NASDAQ:GOOG) and Motley Fool Stock Advisor picks Amazon.com (NASDAQ:AMZN), eBay (NASDAQ:EBAY), and Time Warner (NYSE:TWX) at the end of March. Despite his fund's price tag of 1.68%, Miller has beaten the S&P 500 during each of the past 14 calendar years.
That's an impressive feat, and without a doubt, Miller is one seriously talented manager. But you know what? I still haven't recommended his fund in our newsletter. While Value Trust's expense ratio has ticked down some, it remains too rich for my blood -- particularly when there are other market-beating mutual funds out there that cost much less.
Pay less, get more!
On average, in fact, the typical Champion Funds recommendation will ding you just 0.95%, and, for the five-year period that ended with the month of May, it's also beaten the S&P to the tune of 10.7 annualized percentage points.
Of course, cherry-picking individual winners is one thing; assembling those Champs into meaningful wholes is quite another. But not to worry, Fool: We've got you covered there, too. Indeed, we recently rolled out three mutual fund supermodels, portfolios of funds designed with aggressive, moderate, and conservative investors in mind. And oh, by the way, the average expense ratios for those models are just 0.74%, 0.67%, and 0.52%, respectively.
If you'd like to get the inside scoop on those portfolios -- along with every recommendation I've made since the newsletter opened for business back in March 2004 -- just click here for a risk-free 30-day trial. In the meantime, remember to keep your eye on the price tag the next time you go shopping for mutual funds.
Better yet, take a look at the funds you currently own. Are you paying for the "privilege" of underperformance? If so, it could be time for a mutual fund makeover.
Shannon Zimmerman is a fund junkie and cheapskate of long-standing and, not coincidentally, runs point on the Fool's Champion Funds newsletter service. Shannon owns shares of Vanguard Total Stock Market. The Motley Fool has a strict disclosure policy.
