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Mutual Fund Mastery

September 16, 2011

Mutual fund investing is one of the easiest ways to get into the market.  But whether you are a seasoned investor or just starting out, there are some important things you should know when it comes to choosing the right mutual funds.

The Money-Guy Basics:

  1.  Realize that your investments need a little T.L.C.  No matter what investments you make in life, it is never wise to stroke a check and walk away.  If you work with an investment advisor, he or she is hopefully staying on top of things for you.  If you are a “do-it-yourselfer”, however, it is extremely important to keep a close eye on your funds and any important changes that occur.  For example, fund managers may change, trends may change, the size of a company may change, and the world itself is constantly changing.  Keep abreast of any events that might impact your fund or portfolio.
  2.  Understand how your age, goals, and risk tolerance should impact your investment choices.  It is important to have a grasp on what an appropriate allocation is for your current situation.
  3. Use an effective Mutual Fund Screener.  Our preference (and what we use at Preston & Cleveland Wealth Management) is Morningstar, which offers a free version of their screening tool as well.  In fact, if you are a Premium Member, you have access to our webinar that actually walks you through a risk questionnaire, assigns you a model portfolio based on your answers, and shows you step-by-step how to use Morningstar’s fund screener.

Some key things to look for in your search:

  • Asset class – sort by class to find the best funds for each piece of your allocation puzzle
  • Loads and internal expenses – pay close attention to the fees and share classes of funds.  Loads, or commissions, are what the people selling the product receive.  No-load funds are paid for in another way (i.e. hourly, Assets Under Management, etc.).  The internal expenses are what pay the managers of the funds for running the company.
  • 1, 3, 5, and 10 year average performance – these numbers tell you how a fund performs during good times, bad times, and on average.  We typically like to choose funds with at least a strong 5-year history, but it is important to realize that the track record of the manager can be equally as important.
  • Category average – a unique feature of Morningstar is that it breaks down the performance of a fund compared to other funds in the same category.
  • Fund Score – after doing the above research, you may very well end up with 20 funds.  To further filter your results, look for something called the Fund Score.  This allows you to fine-tune a list of funds by re-ranking according to criteria that are most important to you.  You can select up to 8 criteria and assign weightings to each in order to generate your own custom tailored list.

A couple of other notes:

-To make sure that you are picking the best funds, stay focused on what you are looking for.  One fund or a number of funds in different asset classes?  Growth or value?  Know ahead of time what you want the fund to accomplish.

-If you are still having difficulty narrowing down, research the website of the fund companies to see what fits with your personal management philosophies.

-It is a good idea to revisit allocations about twice a year.  This doesn’t mean you have to make changes, but make sure you are staying up-to-date with any pertinent changes.

As always, we would love to hear your questions and comments either below or on our Facebook page.  Also, check us out on our new YouTube channel for some additional Money-Guy advice!

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