When it comes to investments, many people just want to know what to buy, without necessarily knowing why they might invest in something, or what to look for when seeking great investments.
Here's a look at very promising mutual funds that you might want to invest in during 2019 -- along with a quick introduction to mutual funds and some guidance on how to distinguish between better and worse ones.
What mutual funds are and where to find them
Let's set the stage first: Just what are mutual funds? Well, a mutual fund is an investment made up of many people's money that has been pooled and is managed for them professionally -- for a fee. That's fair enough, because relatively few people are equipped to study stocks and bonds and select which ones to buy and sell, and when to do so. Funds also offer instant diversification, as your assets will be spread across dozens or even hundreds of stocks and/or bonds or other securities.
A mutual fund's collection of securities is its portfolio, and those who have invested in it are its shareholders. You can invest in a mutual fund directly through its company (companies such as Vanguard, Fidelity, and Schwab offer gobs of funds, as do many other familiar financial enterprises) and very often through your brokerage account, too. Most major brokerages offer access to hundreds, if not thousands, of funds. You can invest in funds through your existing IRA -- and you can open an IRA through many mutual fund companies, as well. Finally, 401(k)s also offer mutual funds as investment choices.
Active vs. passive
There were about 8,000 different mutual funds out there as of 2017, according to the Investment Company Institute, plus more than 1,500 exchange-traded funds (ETFs), which are similar structures.
A key difference between mutual funds is that some are actively managed while others are passively managed. An actively managed mutual fund will typically have a team of professional money managers who study the universe of securities they might invest in, choosing the most promising ones. They decide when and how much to buy -- and when to sell, and shareholders pay for their expertise.
Passively managed funds, meanwhile, are more commonly known as "index funds." They require much less professional expertise, as each is based on an existing index (generally a stock or bond index). They simply aim to hold the same components in the same proportion, in order to achieve the same returns (less fees). Not surprisingly, these funds have much lower average expenses and fees, and studies have found that over long periods, stock index funds tend to outperform the majority of managed mutual funds. According to the folks at Standard & Poor's, for example, as of the middle of 2018, 84% of all domestic stock mutual funds underperformed the S&P 1500 Composite Index over the past 15 years. And 92% of large-cap stock funds underperformed the S&P 500.
How to find the best mutual funds
So which funds are the best? Well, it's hard to argue against just filling your portfolio with a handful of low-fee index funds. By doing so you stand a good chance of faring as well or better than someone who sticks with managed funds.
If you do want to try to beat the averages, though, you can seek out exceptional managed mutual funds. You'll need to review a fund's track record (morningstar.com is a great resource for that), but don't just look for the funds with the highest returns. A big double-digit five-year or 10-year average annual return looks great, but it might be due to an outlier of a year with a huge return that's skewing the average. (Similarly, good funds worth considering can have an unusually bad year that results in a lackluster average.)
Be sure to examine any fund's fees. Look for low expense ratios (annual fees) and, ideally, no-load funds (loads are sales fees). For actively managed funds, the median expense ratio was 1.18% in 2017, but the asset-weighted average was just 0.59%, as many huge funds have lower-than-average fees. Index funds in 2017 sported a median expense ratio of 0.33%, and an asset-weighted average of just 0.09%. Bond mutual funds had a median ratio of 0.81% and an asset-weighted average of 0.48%.
A fund's turnover ratio is worth a look, too. It reflects how actively the fund's managers are buying and selling securities. In general, the lower, the better, because frequent trading racks up trading costs that are passed on to shareholders. A fund with a high turnover rate might do just fine, but some studies have found lower rates associated with higher-performing funds. It makes sense, since longer holding periods can reflect managers with more confidence in their holdings as well as more patience -- key traits of successful investors.
The best mutual funds to consider -- for 2019 and beyond
So which funds should you consider for your portfolio? Well, you'll find some strong contenders below, but do remember that there are thousands of funds and many other solid possibilities.
Here are some good index funds with low fees:
Fund |
Focus |
Expense Ratio |
---|---|---|
SPDR S&P 500 ETF (NYSEMKT: SPY) |
S&P 500 |
0.09% |
Vanguard Total Stock Market ETF (NYSEMKT: VTI) |
Total U.S. market |
0.04% |
Vanguard Total World Stock ETF (NYSEMKT: VT) |
Total world market |
0.10% |
Schwab U.S. Mid-Cap ETF (NYSEMKT: SCHM) |
Mid-cap stocks |
0.05% |
iShares Core S&P Small-Cap ETF (NYSEMKT: IJR) |
Small-cap stocks |
0.07% |
Vanguard REIT Index Fund (NASDAQMUTFUND: VGSIX) |
Real estate investment trusts |
0.26% |
Vanguard Intermediate-Term Bond ETF (NYSEMKT: BIV) |
Intermediate-term bonds |
0.07% |
Schwab U.S. Aggregate Bond ETF (NYSEMKT: SCHZ) |
Total bond market |
0.04% |
Another easy way to invest in mutual funds is with target-date or "lifecycle" funds, which allocate your money across various stock and bond index funds according to when you aim to retire, adjusting the allocation (reducing your stock exposure and increasing your bond exposure) as you approach retirement. They're convenient and feature automatic asset allocation and rebalancing. A 2030 fund, for example, will assume you plan to retire near 2030, and will divide your assets between stocks and bonds accordingly. Over the years, as you approach retirement, it will shrink its stock allocation, adding more bonds. These funds aren't perfect, though. They sometimes charge high fees and they all have different allocation formulas. Find one that suits you, or skip it. Your 401(k) might offer some target-date funds, and most major mutual fund companies have suites of them as well.
Below are some promising actively managed funds to research further and consider. They're all no-load funds, too.
Fund |
Focus |
Expense Ratio |
---|---|---|
Oakmark Investor (NASDAQMUTFUND: OAKMX) |
Large-cap stocks |
0.86% |
Primecap Odyssey Stock (NASDAQMUTFUND: POSKX) |
Large-cap stocks |
0.67% |
Dodge & Cox Stock (NASDAQMUTFUND: DODGX) |
Large-cap value stocks |
0.52% |
Primecap Odyssey Growth (NASDAQMUTFUND: POSKX) |
Large-cap growth stocks |
0.67% |
T. Rowe Price Blue Chip Growth (NASDAQMUTFUND: TRBCX) |
Large-cap growth stocks |
0.70% |
Dodge & Cox Income (NASDAQMUTFUND: DODIX) |
Large-cap dividend stocks |
0.43% |
Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) |
Large-cap dividend stocks |
0.08% |
Buffalo International (NASDAQMUTFUND: BUFIX) |
Large-cap international stocks |
1.05% |
Fidelity Total Bond Fund (NASDAQMUTFUND: FTBFX) |
Intermediate-term bonds |
0.45% |
While you can generally take your eyes off your investments for long periods if you're invested in index funds, you shouldn't do that with managed funds. You'll want to make sure they keep beating their benchmark index (though one missed year isn't cause for alarm), for one thing, and it's also good to read communications from fund managers -- and to notice when good ones retire or move on.
Mutual fund investing can be very rewarding -- literally -- and it can be as simple or involved as you want it to be, depending on whether you opt for simple, low-fee index funds or managed funds. You can always do a little of each, too.