Military personnel are often told where to be, what to do, and when. One of the things you’re not told is how to weed through the more than 10,000 mutual funds available in North America and figure out which ones are right for you.
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Here are some guidelines to consider:
Assess Your Situation
Experts say the first step in investing is figuring out your personal financial situation: goals, time horizon, and risk tolerance. You need to know the reason you’re investing—what that money will be used for—and when you’ll need to use it, as well as how much risk you can stomach along the way.
“I always say the purpose of money dictates where it goes,” says Michael Pellegrino, principal and co-owner at GoldStone Financial Group. Decide whether you want the money for retirement 20+ years down the line, for a child’s education, or to purchase a house in the next few years.
The longer your time horizon, the more risk you may want to take, since you will have time to make up for any short-term declines. Charlie Smith, CIO, founder and manager of the Fort Pitt Capital Total Return Fund, says that every 2 or 3 out of 10 years the markets produce negative gains, so you’ll want something that can ride through the down periods.
Do Your Research
Every fund company has a website with tools and information on all its funds. Obviously each institution has a biased opinion towards its own funds and is trying to sell themselves. So if you go that route, make sure you shop around and compare multiple companies.
One solid and unbiased resource, according to Pellegrino, is the Mutual Fund Education Alliance, found at www.mfea.com. It’s a nonprofit trade association for mutual funds, and it has everything from educational resources explaining types of funds, to blog commentary by different institutions that offer them.
Another well-known resource is Morningstar. The site offers a basic membership for free that lets you track investments, read articles/commentary and view basic fund data. Or, you can sign up for a premium account to access all the bells and whistles and screen funds using all sorts of parameters like manager tenure, past performance, volatility and cost.
Smith says that you don’t need a year subscription to do your research and suggests taking advantage of a free trial membership.
Specifics to Look for
Understanding the types of fees and costs associated with funds is essential. Research suggests that load funds—ones that have a sales charge upon purchase (a front-end load), when sold (back-end load), or as long as the fund is held (level-load)—do not outperform no-load funds.
Jane Bryant Quinn, author of Making the Most of Your Money Now, and a self-admitted cost maven, states emphatically that, “There is only one thing that has been proven again and again to improve mutual fund returns, and that is low costs…. Everything else is ruffles.”
According to Quinn, the funds with the lowest costs do better over the long term than the funds with higher costs. The higher cost funds typically take more risks—aiming for higher returns—but they don’t always pay off.
Fund track record and, in the same vein, manager tenure, are also informative statistics to look at. Keeping in mind that past performance is not a guarantee of future results, you want to see how a fund has performed during good market periods, but just as importantly during bad market periods. Look for consistency of returns—that’s a better indication to Pellegrino than drastic up and down swings.
Be sure to check if the current fund manager is the one who built the track record that you’re seeing. When managers change, the outcome of the fund could change with it, so track record means much less if the fund manager is new.
Set It and Forget It
The idea that you’re going to trade yourself to wealth or be able to successfully time the market is a fallacy, according to Smith. He says, “Once you build your portfolio, the less you want to do with it. You want to have the fortitude to add to it when the market’s down, but the less you play with it, the better you’re going to be.”
The experts agreed, once your strategy is in motion—stay the course.
“Investing in a lot of ways is like a bar of soap: the more you play with it the smaller it’s going to get,” says Smith.