Quick: What's the investment vehicle of choice for more than 90 million Americans?
If you said "mutual funds," give yourself a gold star and head to the front of the cubicle.
Here's another quick one: Are funds so popular because, to pick up on our headline, they're the best investment vehicles ever?
Peaceful, easy feeling
To my way of thinking the answer is yes -- or, more precisely, yes, they can be.
The kind of funds worth building your portfolio around make it a cinch to spread your bets across value-priced big boys such as Johnson & Johnson
If you're looking for a no-brainer solution, funds make that a breeze, too -- and you won't have to pay up for the privilege, either. SPDRs
The upshot, then, is this: Well-chosen funds make light work of building a carefully calibrated portfolio. They're the most convenient vehicles for investing in asset classes that may lie outside your "circle of competence," too, which is generally a good idea: Doing so can allow you to sleep peacefully at night, secure in the knowledge that folks who do understand, say, emerging markets and high-yield bonds, are busy building your nest egg.
That said, when it comes to investing, mere convenience doesn't cut it as a thesis. And fund fan that I am, I'm also a realist: Another key reason funds are so popular is that they're ubiquitous. 401(k) plans, after all, are lousy with them -- with an emphasis on the "lousy." And that goes double for the industry's typical entrant, a fund that likely requires shareholders to pay for the privilege of underperformance.
How to separate the keepers from the duds in you plan's -- or your brokerage's -- lineup? Keep the following points in mind, and you'll go a long way toward doing just that:
- With funds, it's really the manager you're investing in. Don't focus on past performance unless that track record belongs to the person who's currently calling the fund's shots.
- Look for low price tags. Unlike any other product, with funds, the price you pay is a feature of "product" itself. The more you pay, the worse your performance will be; and the less you pay, the more moola you'll have compounding, as opposed to fattening the fund company's coffers.
- Last but not least: Favor funds with proven strategies and managers who "eat their own cooking" by investing their own moola alongside that of their shareholders.
The Foolish bottom line
We've been using the above core criteria since Day 1 at the Fool's Champion Funds investing service, and so far, so good: Since opening for business more than three years ago, all of our recommendations have made money for shareholders. Taken collectively, those picks are beating the market by a double-digit margin, too.
I'm proud of our track record, but the fact is, the process we use to separate the wheat from the chaff relies on plain old-fashioned common sense that you can put to work in your portfolio, too. If you'd like to see how we do it at Champion Funds, click here for a risk-free guest pass. You'll have access to our recommendations list, model portfolios, and a special report that provides step-by-step assistance for making the most of your 401(k) plan. There's no obligation to subscribe.
Shannon Zimmerman is the lead analyst for the Fool's Champion Funds newsletter service. He doesn't own any of the companies mentioned. Johnson & Johnson is a Motley Fool Income Investor recommendation. Tyco is an Inside Value pick. The Fool has a strict disclosure policy.