Can the market be topped? Yes, it can. The problem is that it takes work to wind up on top repeatedly -- a whole lot of work, in fact.
Even with instant access to research reports and SEC filings, it can take days to come up with a worthwhile prospect. Buying may take even longer still.
Success means both finding the right companies and paying the right prices for those companies, so it can take a significant effort to repeatedly beat the market on your own. And frankly, if you've got a job, a family, and a life outside of investing, it may not be worth your time.
The best of both worlds
This is why mutual funds can be such powerful tools to build wealth. The right funds have professional management handling your investments so that you don't have to do the work yourself. You also get instant diversification within the fund's classification. That helps protect your overall finances against the failure of any individual company your fund happens to own. All told, owning well-managed mutual funds can help you get where you need to be financially, with significantly less effort than picking your own stocks.
Unfortunately, there is a catch. Professional management doesn't come for free. That means that for you to wind up on top, your funds' investments have to do more than merely beat the index. They have to beat the index by enough to cover overhead costs -- and then some -- before you see a dime of excess return.
Truth be told, you can't know for certain which funds will outperform the market year after year. If the market were predictable, Bill Miller's streak of picking winners wouldn't have ended at 15 years. Fortunately, as my colleague Shannon Zimmerman at Motley Fool Champion Funds has uncovered, there are three traits that put the most successful funds ahead of the rest:
- Low fees
- Stable management with a successful track record
- A solid investing strategy
If you find a fund with those characteristics, you've found one that has the key factors needed to help you reach your goals.
Take, for instance, the Allianz NFJ Dividend Value (NFJEX). With an expense ratio of 0.68%, those institutional class shares carry about half the price of the category average (1.35%). Manager Ben Fischer has led the fund since its 2000 inception and beat the market by more than five percentage points annually each of the past five years. Allianz's strategy of buying dividend-paying companies at value prices is right out of Benjamin Graham's The Intelligent Investor, which Warren Buffett has called "by far the best book on investing ever written." Unfortunately for you and me, the investor class shares of the fund aren't quite the bargains as their institutional counterparts, which is one reason why the fund has not been selected as a Champion Fund.
Peek under the covers
Of course, a mutual fund is only as good as the companies whose stocks it owns. In Allianz's case, the major holdings consist of companies with multibillion-dollar market caps, dividend payments to their investors, and decent valuations:
|
Company |
% of Fund |
Yield |
P/E |
Market |
|---|---|---|---|---|
|
Pfizer |
3.6% |
4.5% |
10.0 |
$189.0 |
|
Marathon Oil |
3.6% |
1.6% |
7.0 |
$35.3 |
|
Washington Mutual |
2.9% |
5.5% |
10.8 |
$34.8 |
|
Altria |
2.4% |
4.9% |
12.2 |
$146.0 |
|
Whirlpool |
2.3% |
2.0% |
15.7 |
$7.0 |
|
Anadarko Petroleum |
2.2% |
0.8% |
4.4 |
$21.4 |
|
AT&T |
1.9% |
3.6% |
20.6 |
$242.5 |
The dividends and inexpensive valuations provide a measure of ballast for the fund's holders. Not only that, the fund's performance since inception has shown that its strategy can beat the market over time.
Balance your money and your life
When you know what to look for in mutual funds, you can get the performance you need to wind up on top without dedicating all of your time to investing. Remember to keep it simple: look for low fees, stable management with a successful track record, and a solid investing strategy.
To see Shannon's list of funds -- which are beating the market at large by more than 14 percentage points -- take the next 30 days to try us free at Champion Funds. You've got nothing to lose but a fraction of your time; once you're successful, you'll likely gain back all that much more of it.
At the time of publication, Fool contributor Chuck Saletta did not own shares of any company or fund mentioned in this article. Pfizer is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.
