What should I be looking at when choosing a fund to invest in?

**LuxLiving** · 05-24-2008, 06:24 AM

Go over to Fidelity or Vanguard and do some of their free retirement planning assessment tests. It will help you decide what your risk tolerance is and give you a starting place to determine what percentage you should have in growth, vs. balanced, vs. value, vs. super-conservative bonds, etc. Then you'll at least have an idea of what kind of risk you're able to tolerate and what kind of asset allocation to make. Then I'd get on the horn w/whoever holds your Roth choices and ask them which offerings they have fit those designations (some are self-explanatory in the name [i.e., Growth Fund] and some aren't) and ask for assistance in getting the percentages correct for the long-term outlook based on your age and tolerance for risk.

Keep reading financial books & online to learn all you can about what you're doing!

**maat55** · 05-24-2008, 03:28 PM

I agree with LuxLiving, read books about mutual funds and personal finance. You'll learn quicker and easier this way. At your age you can't go wrong with your investments. I would advise that you do five year checkups on your funds to see if you should move to another one.

**disneysteve** · 05-24-2008, 04:13 PM

Originally posted by AmbitiousSaver View Post

Being 26, I know the money can withstand some risk... but I still want to stay on the conservative side if possible.

Everybody's definition of "risky" and "conservative" is a little different. You could be 100% stocks or 90% stocks/10% bonds or 80/20 or 70/30 or 60/40... You need to decide what allocation will still let you sleep at night. As noted, there are some online surveys to help you sort that out.

The Balanced Strategy MF is in the "Asset Allocation" category and to be honest, I don't really know what that means

NEVER INVEST IN ANYTHING THAT YOU DON"T UNDERSTAND! This is a cardinal rule of investing. Read the prospectus. You don't need to read every word of the legalese, but you do need to read the description of the fund, the investment goals and the types of investments held by the fund.

What should you do? None of us can really answer that for you, but if someone really wanted my opinion here is what I'd suggest.
1. Total US Stock Market Index fund
2. Total International Stock Market Index fund
3. Total Bond Market Index fund
You need not make things any more complicated than that. All you need to decide is how to divide up the money amongst those funds.

And if you want true simplicity:
1. Target Date Retirement Fund 2050

That would take you to age 68 with instant diversification that automatically adjusts to a more conservative portfolio as you get closer to retirement age.

**noppenbd** · 05-27-2008, 05:00 AM

AmbitiousSaver, the way to look at investing is to see your portfolio as a whole, rather than a bunch of individual mutual funds. When you look at the whole porfolio, numerous studies have shown that the single most important factor for long term success is asset allocation, not which funds you choose.

With that in mind, you should start (as Luxliving said) by deciding on an asset allocation for your retirement portfolio. This would include Roth IRAs, traditional IRAs, 401ks, and any other savings that is intended for the long-term. Combine the balances together and figure out your entire portfolio value. Someone with an investment horizon longer than 15 or 20 years should probably be on the aggressive end of the risk spectrum. As you get closer to retirement, conservative investments should make up larger percentages of your portfolio. There are numerous investment websites that can help you decide your risk tolerance and choose an asset allocation based on that. Generally, if your time horizon is long, and you don't mind year to year swings in your portfolio (as long as the overall long-term trend is up), the bulk of your portfolio will be invested in stocks, with the majority in large US stocks, and some smaller fractions in small US stocks and international stocks. The remainder of your portfolio will be in bonds, possibly including some international bonds. Some asset allocators will also suggest small amounts of REIT mutual funds or commodities.

Once you have decided on an asset allocation (let's say for example you come up with 45% Large Cap US stocks, 25% Small Cap US Stocks, 15% International Stocks, and 15% Bonds), implementing that asset allocation is where the "art" comes in. This is where you need to be able to critically assess the investments. There are a number of dimensions whereby this can be done.

Simply looking at the Morningstar rating is one way.

Personally I put great amount of weight towards low expense investments. Expenses create a drag on your investments and make it harder for them to outperform benchmarks in the future. I avoid transaction fees or loads (when purchasing the funds) and try to select funds with low management fees (less than 1% certainly and less than 0.5% ideally). I also avoid 12b1 fees, which are junk fees used to reimburse brokers who promote the funds.

Looking at past performance is somewhat pointless, in my opinion. No one really knows what funds will outperform in the future. Managers who have had a few stellar recent years may have their risky investments catch up with them tomorrow. Taking that to the extreme leads many to select index funds, which do not try to beat their benchmark, but have their investments selected automatically by a computer attempting to track a benchmark exactly (like the S&P 500). Index funds usually have razor-thin expenses and eliminate "manager risk".

Using the above techniques you should evaluate the current funds in your portfolio. If you have some that you would like to keep, you should use a tool like Morningstar's X-Ray to determine what the fund(s) hold. Then a little math needs to be done. Let's say your portfolio is $100K, and you currently hold $30K in a fund which turns out to be 50% small cap US funds and 50% international funds. Using the above 45-25-15-15 allocation, the $15K worth of international funds would complete that allocation in your portfolio, with the remaining $15K going towards the 25% small cap allocation. Then you would need to allocate the remaining $70K of your portfolio into $45K large cap, $10K small cap, and $15K bonds. As disneysteve said, this can easily be done using index funds targeting the specific indexes (large cap=S&P500, small cap=Russell 2000, bonds=Lehman US aggregate bond index). Once you get your asset allocation to your liking, X-Ray it first to make sure it is within a few percentage points of your target. Then once a year or so check the X-Ray to see if your portfolio has grown out of whack, and adjust if necessary. In addition, every few years you may need to adjust your asset allocation target as your investment horizon nears.

If the last paragraph seems like too much work, a target-date retirement fund is an easy way to automatically manage your asset allocation (as disneysteve mentioned). Vanguard's target-date funds have the additional advantage of being low cost (they are composed mostly of index funds).

There is no "right" answer to choosing a fund, as long as it, along with the rest of your portfolio, gives you a reasonable asset allocation.

**jIM_Ohio** · 05-27-2008, 11:59 AM

The most conservative 100% equity fund you can find is a large cap value/ equity Income fund. I have 45% of my retirement in PRFDX- I consider this the most conservative mutual fund on the planet which is 100% equity.

The most important thing before choose funds is to choose an asset allocation. % stocks-%bonds-%cash. If interested in commodites, add a percentage to that too.

The you need to take each category and break that up. Why? Because if you choose 80% stocks and 20% bonds as your allocation, but you put that 80% stock position into only one fund, I would argue that my 100% equity portfolio divided into 5 funds is actually less risky (as measured by volatility) than the one fund which is an 80% position.

Risks will be what you define them to be. My risks are different than anyone elses. DO NOT let anyone tell you how much risk to take. You need to figure that out yourself. You won't get it right the first time, but I would not STOP investing, or not begin to invest because you are not 100% sure. 50% is OK, just watch out for what is going on.

An investor will go through 5 phases:

1) beginning
2) accumulation
3) growth
4) stability
5) draw down

In the beginning you are learning and will make mistakes. It is OK to make a mistake if you learn from it quickly.
You then accumulate. At this point you have an asset allocation, and you deposits make up 5-100% of current account balance. Large returns in a given year look good, but small returns suggest your deposits look good.
Growth is when even small gains in the market are large relative to what you can contribute each year. You don't have enough to retire on (or be financially independant).
Stability is when the end is in site, and you have made a conscious decision to ratchet down the risks taken to reach the end goal. It is possibly to retire in stability mode when gains and interest pay living expenses.
Draw down is when you have to sell shares to meet income needs.

When choosing a fund now, think about #1 and #2, and maybe #3. Do not worry about stability now (as far as fund selection). Your goal should be to choose the best asset classes to make you money now and over next 20-30-40 years.

**zetta** · 05-27-2008, 03:15 PM

I'm reading a book that may be helpful: Mutual Funds for Dummies.

**maat55** · 05-27-2008, 06:50 PM

I look for long track records and advoid specific comodities like gold.

**poundwise** · 05-27-2008, 07:21 PM

Buy waffles!

Or seriously, read as much information like this as possible.

See if your local library, or bookstore if you prefer, has one of these books.

What should I be looking at when choosing a fund to invest in?