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Choosing the best mutual funds
Asset allocation first!
Before choosing a mutual fund you first must
decide on as asset allocation. Asset allocation in a nutshell is how you are
going to spread your money over the various asset classes. There is a lot of
information on the web addressing asset allocation. I would spend some time
getting one that is right for you. People who stick to their asset allocation make money over time if it is well planned.
There are two schools of thought selecting the best mutual fund. In one school the best mutual fund is the one with the best manager. The other school believes index funds are the best choice. Research shows that index funds outperform 80% of domestic stock funds. This percentage goes down as you get into international funds sector funds, and particularly emerging market funds. In the case of many 401K’s, or 403B’s your choices are very limited. In those cases an index fund is the best choice. If you have a self directed IRA, a lot of choices in your 401K, or investing outside of a retirement plan then I don’t think and index fund is the best choice.
Many times a 401K offers a target retirement fund. These funds are easy to identify because they usually have a date in their fund name. Two examples are the Fidelity Freedom 2030 fund or the Vanguard target retirement 2030 fund. I am not a big fan of these funds but too often they are the best choice for the investor in a 401K.
The best funds will make you more!
Selecting the best funds
To select the best mutual fund there are several places on the web including but not limited to fund picks from Fidelity or Morningstar. I am particularly fond of the fund picks from Fidelity that are not from the Fidelity family. Not to say that Fidelity does not have some wonderful funds (I own a number of them) but they tend to bias towards their funds. If you read my other hubs on funds you will find I do not always agree with Morningstar.
Watch for a fund manager that has a good track record over at least 5 years. Not that someone with less than 5 years is not going to do an outstanding job they often do. If you find a manager who has managed a fund for 20 years and beaten the market for the last 20 then chances are they will do it this year too.
Investigate to see how the fund has performed in bad markets as well as good. The internet has a number of tools to perform this check. A word of caution here sometimes mutual funds pay dividends. The chart or data table you may be using may not take that into account dividend payments the mutual fund has made. I personally like Yahoo historical data for investigating how a fund has performed from date to date. The data will tell you when a distribution was paid and how much the distribution was. Another nice function of yahoo historical data is the fact that the data imports nicely into an Excel spread sheet. If you are skilled at Excel you can do a lot of data comparisons and even make charts.
Checking for specific dates can give you a better idea how the fund performs. March 9, 2009 was a recent low in the market. Check to see how the fund did over a time period on the way down against the market before this date. Do the same on the way up after the low.
After seeing how the fund has performed in both bad and good markets you can better make a choice. I can accept a fund that underperforms the market on the way down and over performs the market on the way up. Likewise I can accept lower performance on the way up if the fund lost much less on the down.
I would not invest in funds that have screens. These are often called social funds. These funds cover the religious and political spectrum. I respect people who invest in accordance with their beliefs but often the performances of these funds suffer.
Any one Sector or specialty funds should be limited to seven percent or less of your assets.
You may not be in the best mutual fund. Even if your asset allocation is sound you may be in a bad fund. Knowing when to sell your mutual fund can be more important than buying the best one.
Please feel free to investigate my other hubs on the best small cap, best mid cap , large cap, international, concentrated portfolio and the best fixed income mutual funds. If you are not comfortable doing an asset allocation for yourself consider investing in the best balanced funds. Being in the best funds will help your investments grow faster.