OK, so you’ve finally convinced yourself to enroll in your company’s 401k plan or maybe open up an Individual Retirement Account (see my article Roth IRA vs. Traditional IRA 2008). You’ve filled out the application and set up your automatic contributions. The problem is, you have no idea what to invest your money in now that it’s in your account.
By no means am I an expert when it comes to picking individual stocks (read about my day trading stories here). But the free Mutual Fund Screener available at Morningstar.com can easily help you find mutual funds that have traditionally performed better than others, thus increasing your chances of making the most money. (Just remember that past performance is no guarantee of future results).
How Will I Know What to Look For?
You want to look at the 10 year track record of a mutual fund, and compare it with other funds of the same category. For instance, if you find one Mid Cap Blended Fund that has consistently outperformed other Mid Cap Blended Funds, and it has had the same manager the entire time, it may be a good fund to invest your money in. 1 and 3 year track records don’t tell us much because even bad fund managers can have a “lucky” year or two!
Watch Out for the Fees!
There are many fees that go into running a mutual fund. Money is needed to pay the fund manager and staff, marketing fees, and legal and accounting fees, to name a few. Fortunately for the investor most funds publish what is known as an expense ratio that accounts for all of these expenses together. You can easily compare the fees from one fund to the next by looking at the expense ratio. When you are comparing the performance of two different mutual funds it is important to consider these ratios and here’s why; suppose one fund has an expense ration of 2% with a 10 year performance average of 13%, it would be logical to pick it over a fund that averaged a return of 9% over the same period but only had an expense ration of 1%. In this case the performance of the costlier fund more than made up for the increased fee.
No-Load vs Loaded Funds
Some funds require investors to pay an upfront “load” when purchasing a particular fund (sometimes as high as 5% or more). To me, a “load” is nothing more than an initiation fee to play on the same course that everyone else is playing on for free (couldn’t resist the golf analogy). Unless the fund has a considerably better performance record than it’s “no-load” competitor I would not advise investing in a “loaded” fund.
The Morningstar.com Mutual Fund Screener is fairly straight forward. You can filter your results by 1, 3, 5, and 10 year returns, expense ratios and loads, tenure of current manager, minimum initial purpose amount (many funds can be bought into for $500), and Morningstar’s Own Personal Rating (between 1 and 5 stars with 5 being the best). Simply adjust the variables you want to filter your mutual funds with and the screener will sort through thousands of available funds.
A rule of thumb that has always served me well is to put 25% of my money in each of the following mutual funds categories.
25% in an International Fund (My favorite is Fidelity Diversified International FDIVX)
25% in a good Small Cap Blended Fund
25% in a good Mid Cap Blended Fund
25% in a good Large Cap Blended Fund
I offer the above only as a suggestion and not the rule, there are more opinions on “allocation strategies” than there are mutual funds!
Feel free to contact me with any questions you may have, I’ll try to answer them the best that I can or direct you to someone that can.
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