With the sheer number of investments out there to choose from, finding winners takes a lot of work. It's just as valuable, however, to know how to steer clear of an investment that could potentially wipe out your savings.
For instance, take a look at a trend that's been building for more than a year now: mutual funds that are reopening to new investors. For some investors, few things look more attractive than the opportunity to get in on a previously closed fund. But just because a fund decided to close its doors a few years back doesn't mean that it's the right place for your money today.
The fast pace of funds reopening
Since the beginning of 2008, nearly 100 closed funds have started accepting new investors again. In some cases, though, newly opened funds have gotten such an influx of money that they had to close again quickly -- within months or even days after opening. Especially with small-cap funds, which suffer a big handicap when they have too much money to manage, you can't count on a newly available fund staying open for long. So when good opportunities present themselves, you have to act quickly to take advantage.
But as the latest special report from our Champion Funds mutual fund newsletter discusses, you can't just assume that any reopened fund is a great deal. By looking at some of the less attractive funds available to investors, you can learn a lot about what to seek out and what to avoid in a mutual fund.
1. High fees.
When the stock market rewards investors with double-digit annual returns for years, it's easy to forget about what you're paying on a given investment. But when you're losing money on your investments, every extra penny you pay in fees is a penny you can't afford to lose.
But many funds can't overcome the drag that high fees have on returns. For instance, JPMorgan Diversified Mid Cap Value A (OGDIX), with current investments in Safeway
2. Bad performance.
If a fund that reopens doesn't invest well, you obviously shouldn't waste your money. Although short-term underperformance may not be a huge problem, an extended string of bad years should give you enough evidence to steer clear.
For example, the Buffalo Micro Cap Fund (BUFOX) recently reopened; it has risen nearly 37% in the past three months on the strength of stocks such as Ciena
But its long-term record is much worse. Over the past five years, the fund has lost an average of more than 7% per year, putting it in the bottom 5% of small-cap growth funds. That's not what you want to see over the long haul.
3. New fund managers.
Another reason why you might not be in a hurry to go to a reopened fund is that the management team has changed since the fund closed. One example: the flagship Fidelity Magellan Fund (FMAGX), which closed to new investors way back in 1997.
In the years since Magellan was last open, managers have struggled to uphold the Peter Lynch tradition of strong returns. Since the current manager, Harry Lange, took over the fund in 2005, the fund has had its ups and downs. After a promising start, Lange failed to avoid big losses in 2008, as shareholders saw a 49% drop in their investment. The fund's successes with Apple
When truly great funds reopen, you should be the first to step up and buy. But not every newly opened fund is great. Before you pick a reopening fund, be sure that it's really the best place for your money.
For more on investing well:
The latest special report from Motley Fool Champion Funds gives you our top 10 picks for newly reopened funds, as well as other funds to avoid. You can get full access to the report, our latest newsletter issue, and a host of other resources -- all free with a 30-day trial. Click here to get started.
Fool contributor Dan Caplinger was shocked when his money-market fund closed to new investors, but he's holding his shares. He doesn't own any of the funds or stocks mentioned in this article, except for General Electric. Apple is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy tells you which stocks we like, and which we're avoiding.