Here are five quick tips for mutual fund investing in 2010.
Most of us look at the turn of a calendar year with the hope that the mistakes we made in the previous year will not be made in the new one. This is noble and in many cases futile. These attempts are usually too difficult to handle, which is why, in many cases you haven’t done anything before this point.
But with little effort, you can change how you invest. For the vast majority of us, investing requires far too much time. It requires continued education (which I fully recommend), frequent monitoring (which can involve little more than opening your statement just to make sure your investments are going where you intended) and a clear-cut understanding of where you are on the timeline (beginning to invest or at it for awhile).
Altering bad investment habits is not that difficult. Before we get to the quick tips, let’s look at those hurdles.
Continued education: For over twelve years I have been offering an ongoing look at how to use your money. Through sites like BlueCollarDollar.com and with the numerous blogs I contribute to including MomsMakingaMillion and BoomersRetirement, I have sought to keep your money safe. Sometimes that meant safe from you.
With only so much available capital to play with (your paycheck has limits), ptting that money to the best use often means making the tough choices. The old, timeworn advice of paying yourself is still useful. The options are however limited. The 401(k) is still the easiest way to do this without feeling any budgetary pain. Simply put 5% away, pre-tax – before you have any other deductions withdrawn and you are far better off than had you done nothing. In many instances, this will be enough to get the employer match and if they do not offer this incentive, this deduction will not change your net. That’s right, you will still have the pay you take home remain the same.
IRA investors will have a little more difficult time with this one. You must first find a fund, set up an account for automatic withdrawals from your checking account and leave it alone. The tax advantages will come at the end of the year (and if you have enough money left over from Christmas, you can catch up for the tax year 2009 until April 15th – using that tax return is the easiest).
Either way, you are confronted with the dilemma: where to put your money and which mutual fund is best?
Should you consider past results? By all means. Although a great many new investors and more than few seasoned ones tend to gravitate towards the overall performance. Nassim Taleb suggested that you might consider these sorts of averages in the following way. If you were to line up a hundred people, 98 of them five foot ten inches tall with one ten foot giant on one end and one four foot small person on the other, these would not have any effect on the overall average. BUt when we choose a mutual fund, we look at, in many instances the highest point, particularly if that high point occurred recently.
And, for many funds, 2009 was exactly that sort of year. The whole economy recovery is still in the process of gaining its footing. But the stock market has pulled enthusiastically ahead. You need to make it a habit ( a resolution if you will) to look much farther back, as long as ten years. Look at the low points more than just the peaks. How a fund recovers from a valley may be more important that a couple of recent successes.
Is longevity important? Yes, but not necessarily the fund’s length of service. Look at you mutual fund choices as something of a used car loot. Numerous owners have left the selection before in varying conditions. This is why the sales pitch “one owner” resonates with this type of buyer. Could you apply the same thinking to a mutual fund?
Yes, but not so much for the fund as for the manager. Tenure is key to consistency. Over time, fund managers come and go. Some have been lured into the lucrative world of hedge funds and some have yet to prove they can do what you would like them to do. This means the helm of the fund may have changed. The effort to find this sort of information out is minimal. You need only look back five years to do so. Five years? you might be asking wondering if you have just uncovered a contradiction. Ten years or longer for the fund; five years or longer for the manager. If the fund is stable, the fund will hire a manager most likely to keep it that way. No new flashy improvements. Just someone to keep it on track and abiding by the charter.
Does size matter? How do you determine size would be of greater importance. An enormous asset base means the fund will move slower in divesting (selling off holdings) and have more long-term investors. The smaller the asset base the more nimble. The more nimble the fund usually means higher portfolio turnover and this can rack up costs in a very short time. Small is good, only if the fund manager is tax efficient and concerned about fees.
Who’s your Daddy? The larger the company (the business that owns the mutual fund investment, usually traded publicly) the greater the likelihood your fund has orphan funds (investments no one wants) embedded in your portfolio. Mutual fund families start lots of funds each year. Each one more segmented and narrower in focus. But this sort of cut-and-slicing of the marketplace does not always achieve the results the fund family would like. Rather than sell the assets and send the investors in them packing, a merger occurs whereby the bad fund gets rolled into a better fund.
Smaller fund families are less likely to do this. Does this make them better, more efficient or worth the gamble? Yes for another reason. many large fund families charge individual investors higher fees in large part because they lower fees in defined contribution plans like the 401(K). Smaller companies rarely have access to this market so keeping fees competitive is extremely important. If they don’t, they must, in order to attract investors, perform better than their peers to make up for the added costs.
How so do you diversify? A little of this, a little of that (growth – funds that are actively managed offer potential upside, value – a focus on more established companies that are not as popular but offer upside for that very reason, small – focused on smaller businesses that have may be more volatile and not have a large investor base, mid-cap – these funds are on the move and have more stability that smaller cap offerings and have yet to attract enough attention, or large cap – often referred to as the top 500 companies, usually more established and often with dividends along with some income funds – these funds focus on the dividend side of the investment portfolio offering additional income) keeps your risk in line.
These can be invested in using index funds (passively managed investments that seek to mimic a published index) or through actively managed funds. If you are a younger investor, divide your contribution evenly. If you are an older investor, the addition of some stability in the form of a balanced fund (I am on record as not being a fan of target dated funds – too new and not transparent enough) that adds some fixed income to the mix.
There is no magic number of mutual funds for any portfolio. A minimum of three and a maximum of six would probably get you enough of a spread across enough of the market. If you have access to an international fund, add that as well in smaller quantities (ten percent or less). Many of your larger funds will have internationally based companies already inside (these would be companies that do business globally that are US based).
But by all means, invest in 2010.
To read my outlook for the coming year, consider 2010: Hope for a Decade Lost.
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