The idea that a savvy individual investor with the right approach can beat the Wise Guys of Wall Street at their own game is the very cornerstone of Foolishness. But as Fool fund guru Shannon Zimmerman often says, there's no reason you can't apply that approach to the world of mutual funds as well.
Let's face it -- for many (heck, most) of us, the money we invest through our workplace 401(k) or 403(b) plans represents the biggest chunk of our nest eggs. In the vast majority of those plans, your investment options consist of (a) mutual funds and (b) more mutual funds, with maybe employer stock or a few other odds and ends thrown in for good measure.
Clearly, every Fool will have to come to terms with mutual funds sooner or later. And that's a good thing: Despite their well-known drawbacks -- fees, institutional pressures that lead to short investment horizons, an industrywide history of market-lagging performance -- an actively managed mutual fund is often just a better solution than picking stocks yourself. A few funds would make great additions to any portfolio. More on how to find those in a bit.
What are the situations in which a mutual fund is the best option? Four come to mind.
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You don't have the time or inclination to manage a stock portfolio. Long the biggest selling point of mutual funds, this remains a strong part of their appeal -- diversification and professional management that's quick and easy to buy. You can build a complete U.S. stock portfolio with just two or three funds. For instance, put a fund that specializes in value-priced big names such as Pfizer (NYSE:PFE) and Nucor (NYSE:NUE) together with a more aggressive growth fund that owns companies such as Google (NASDAQ:GOOG) and Network Appliance (NASDAQ:NTAP), and you've got yourself a complete, diversified stock portfolio that should perform well over the long haul, with minimal maintenance -- provided you pick good funds, of course.
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You want access to esoteric assets or markets. You may know what a junk bond is, but did you ever try to buy one? Do you understand the complexities of the scary end of the bond market well enough to make informed investments? Or would you rather hire someone who makes a living picking junk bonds to assemble and manage a junk-bond portfolio for you? Foreign markets, too, can present challenges for the individual investor. A couple of years ago, I decided to add Latin American exposure in my portfolio. I could have just bought Petrobras (NYSE:PZE) and Cemex (NYSE:CX) -- the two Latin American companies whose names came to my mind first -- and hoped for the best. Instead, I decided to hire a submanager for my portfolio -- someone who knew the territory far better than I ever would -- by buying into the Fidelity Latin American Fund (FLATX). It hasn't been the best fund in its category, but it has done well. Even after fees, my average annual returns have been well over 50%, and my exposure to the region is much more diversified than it would be had I tried to assemble something myself.
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You want no-brainer market-matching performance. Want to track the results of a market index -- any market index -- at low cost? Buy a low-cost index fund. Boom, all done.
- You want to beat the market, with less hassle. Yes, we Fools often go on at length about how most actively managed funds lose out to the market averages over time. But there are a few bright, shining exceptions -- funds with sound strategies and skilled managers that outperform year after year. As Shannon says, for those who want the market-crushing benefits of good stock picking without having to do all the work, those funds can be the "Best. Investments. Ever."
And speaking of Shannon -- and not doing all the work yourself -- if you want to find those bright, shining exceptions quickly and easily, the Fool's Champion Funds newsletter service is the way to go. Shannon's the ringleader over there, and every month he and his crew offer up a well-researched recommendation, together with several pages of great educational content. All of the back issues are available, all past picks are tracked and updated, and there's a great members-only message board for your questions and comments. The price is a pittance compared with the performance gains your portfolio will receive, and we'll spot you a 30-day all-access guest pass so that you can check it out thoroughly before spending any money. There's no obligation to subscribe.
Despite having spent nearly 10 years in the mutual fund business, Fool contributor John Rosevear still thinks a good actively managed fund is a thing of beauty. He owns shares of Fidelity Latin America Fund but does not have a position in any of the stocks mentioned. Cemex is a Stock Advisor recommendation. Pfizer is an Inside Value selection. The Motley Fool's disclosure policy, which knows a thing of beauty when it sees one, will take breathtaking mountain vistas and gorgeous ocean views over a boring old mutual fund prospectus any day. Come to think of it, so will John.
