Do you spend more time looking at pictures of your high-school classmate's grandkids on Facebook than you do looking at the mutual funds in your portfolio?
Sure, funds' fact sheets might not be as entertaining as the latest cat video or celebrity scandal, but as a means to secure your financial future, we think mutual funds require some due diligence beyond a Google search. Yet many investors who choose to go it alone likely do very little research before investing in mutual funds, finding the necessary analysis boring, tedious, and/or confusing.
The mutual funds you choose matter. Some investments will suit you and your goals better than others, but you can't tell which ones might fit into your overall strategy simply by looking at their performance.
If you want to "like" your nest egg as much as the latest picture of your neighbor's dog, here are a few questions you should ask about each mutual fund in your portfolio.
1. Does this mutual fund fit into my investing strategy?
It doesn't matter how well a fund is performing if it doesn't suit your long-term investing goals.
2. Do I like the way the fund has performed over time?
Look at average performance over one-, three-, five-, and 10-year spans to get a true picture of the fund's long-term performance. To check for consistency, you might look at the fund's returns compared to its appropriate benchmark. (Remember, though, that past performance is no guarantee of future results.)
3. Am I OK with the costs associated with this mutual fund?
An expense ratio is a measure of what it costs a fund company to manage a mutual fund. For individual investors, the expense ratio is a fee for management costs paid for out of your investment in the fund. Do you know how much you're paying in fees and expenses?
While you shouldn't pick funds solely based on fees, expenses matter because high fees will substantially reduce your returns. Remember, though, that some things in life are worth paying more for, and a good fund manager is one of those things. One rule of thumb: If the fund's expense ratio is more than 1.5%, you should be really sure about the fund manager before you buy.
4. Has the management team been at this fund long enough for me?
It's generally best if a fund's manager has been running the fund for at least three years, but you should dig deeper than that. When selecting funds for our clients' portfolios, we'll also look at a manager's history at a previous fund, firm, or other institution. For example, while portfolio manager Lawrence Kemp has only been at the helm of Laudus U.S. Large Cap Growth fund for less than two years, he actually ran the fund for nearly 10 years while working for the fund's previous sub-advisor.
5. Does the management team follow the mutual fund's mandate closely or loosely?
Style consistency is certainly something we look for in fund managers. It makes them a better fit for our asset-allocation process if they stick to their particular area(s) of expertise and the type of investment strategy we've explicitly picked them for.
6. Am I comfortable with the way the fund handles volatility?
While all investments carry some risk, some investments are riskier than others -- and just because a particular investment seems fairly stable now doesn't mean it will always be that way. Make sure a fund's volatility level is an appropriate fit for your investing goals and your level of comfort with the ups and downs of the market.
The mutual funds that are right for your friends and family probably won't be the same funds best suited to you as an individual investor. You likely have different goals and a different tolerance for risk, resulting in different answers to the questions above. The key is developing a personalized strategy and goals and then finding investments to best help you reach those goals.
This article was originally posted on The Mutual Fund Store.
