The Investment Company Institute, the fund industry's research and lobbying arm, reports that more than 8,000 stock and bond funds are currently vying for your hard-earned investment dollars. The vast majority of these are market-lagging duds, funds that make you pay for the "privilege" of long-term underperformance.
There are diamonds among the dross, however, and I've spent the majority of my investing life tracking down these winners.
So what are the secrets for success in fund investing? Here are three key factors.
1. Don't overpay.
For starters, I don't recommend funds with luxury-item price tags. The typical domestic-stock fund will ding you roughly 1.4% each year. But with funds, you typically get what you don't pay for, so generally, the lower the better.
Moreover, there are low-cost funds that cover all corners of the market. Whether you're a growth-oriented investor with a hankering for the likes of Monsanto
2. Invest in the manager, not the fund.
All too often, prospective investors make decisions based on a fund's lofty star rating or Lipper leader score. Don't do it. Those are helpful tools, but they're purely backward-looking measures, and they may not reflect the performance of the fund on the current manager's watch. A fund can only be as strong as its stock-picker-in-chief, of course, and as I go about the business of finding tomorrow's mutual fund winners today, it's the manager's track record I focus on, not that of the fund itself.
3. Conduct ongoing due diligence.
Funds have it all over stocks when it comes to peace-of-mind investing, but that doesn't mean you can set 'em and forget 'em. Whenever a fund closes to new investors, or goes through management changes, you have to examine the facts with the proverbial fine-tooth comb to find out how best to proceed.
Beyond that, ongoing annual rebalancing of your fund portfolio is a must. The market has a habit of throwing carefully calibrated asset-allocation game plans (and you do have one of those, right?) off-kilter. Your mission as a savvy fund investor is to ensure that your portfolio remains tailored to your investing timeline and tolerance for risk -- no matter which way the market's wind blows.
I'll be putting all these principles to work as I initiate a new product, Ready-Made Millionaire, which is a real-money portfolio made up of stocks, mutual funds, and ETFs. For more information on becoming a charter subscriber, simply enter your email address in the box below.
This is an updated version of an article first published on Jan. 17, 2006.
Shannon Zimmerman does not own shares of any stock mentioned in this article. Amazon.com and UnitedHealth are Motley Fool Stock Advisor picks. UnitedHealth is an Inside Value selection. The Motley Fool has a disclosure policy.