Choosing the right funds is not always the easiest thing to do. Most people do not even spend enough time understanding their plans in order to get the most out of them.
Choosing the right funds is not always the easiest thing to do. Most people do not even spend enough time understanding their plans in order to get the most out of them. The truth is that spending a couple of hours periodically will benefit you for the rest of your life. Some articles recently have noted that individuals spend more time planning for their annual vacation than they do for meeting their financial goals.
There are three main things to look out for: prior performance, expense ratio and fund manager’s experience.
Look for funds that have track records of a minimum of three years or a specific strategy you cannot obtain by investing on your own. Typically, performance will be published in one-, three-, five- and ten-year increments. Compare the performance of these funds against the appropriate benchmarks, like the S&P 500 Index or Russell1000 Index, as well as other funds in the peer group.
Many people think that the best funds have the highest expense ratios, but that is not necessarily the case. In many cases, you are paying for the name or advertising. There are a number of very good funds with much lower expense ratios. For example, index funds may offer an alternative strategy to traditional mutual funds and will usually have minimal expense ratios. So if you want to match the S&P 500 index, this is probably your best bet.
On any of the aforementioned websites there will be a section with the fund manager’s experience and tenure in the industry. It’s important to find a manager that has been around long enough to have invested in different market environments and cycles. Ideally, try and find a manager with a minimum of 10 years experience — either with the fund you are researching or in the area the fund is investing within.
If you are not comfortable with determining your asset allocation or rebalancing, target date funds are a very good option. Target date funds will have a title similar to “Retirement 2040.” Target date funds will allocate the bond/equity mix according to your estimated year of retirement. Instead of having to monitor your asset allocation percentages yourself (60/40 for example), target date funds handle it for you.
Target funds will also balance the funds according to your age. As you near retirement, the funds will be invested more conservatively. There will be greater equity exposure/less bond exposure at younger ages and less equity exposure/greater bond exposure at older ages.
Just know that you are paying for the active management of these funds and they can be expensive.
Researching mutual funds may seem like a daunting task, but these days there are plenty of websites out there to help you get through it. Most of the websites are free and contain all the information you will need to make the correct choices. Morningstar and Google Finance will assist you in researching the entire universe of mutual funds.The first thing most people will look at is the track record of the fund they are investing in. This is a very important part of the selection process, but it is just one element of the overall decision that you will ultimately make. Expense ratio and experience of the fund manager are equally important.Prior performanceExpense ratioFund manager’s experienceTarget dateIn summary
When selecting a mutual fund, pay close attention to performance, expense ratio and the fund manager’s experience. While index funds are a very good and inexpensive option, target date funds will take the work out of determining your asset allocation and rebalancing. Just make sure there are no additional fees layered on top of the actual investments
CFA, CFP, FCAS, MAAA,
Jerry A. Miccolis, is principal and chief investment officer at Brinton Eaton, an SEC-registered wealth advisory firm in Madison, N.J. He is the co-author of
®, published by Wiley in 2009. He can be reached at
Asset Allocation For Dummiesmiccolis@brintoneaton.com