Mutual Funds - What to consider

[NetSkyBlue]

I started a 401k with my current employer 5 years ago, and I sat down with the representative from Fidelity and we (he) chose what funds to allocate my money to. I would like to be able to look over my portfolio and decide whether the funds I am invested in are the ones I WANT to be invested in, but I have no real idea what to look for.

Depending on what happens in January, I may be changing employers and rolling my 401k into an IRA, so I want to have some idea now of how to choose funds. I will also be opening a ROTH IRA sometime in 2012, as well (regardless of whether I change employers).

I'm 28, have an decent tolerance for risk, but don't want to do anything too risky within the next month, since I don't know if I will have to sell and buy into new funds if I end up rolling over into an IRA.

Today, my current balance is $12,830.02 with $11,617.28 vested.

When comparing my fund choices, I can see Avg annual total returns for 1, 3, 5, and 10 years and life, overall Morningstar rating, YTD returns, NAV, Net Assets, and the Morningstar category.

I know that given my age and risk tolerance, I will want to designate a bigger portion of my portfolio to Stocks in the Mid, Small, and Growth categories (than someone older, or with less risk tolerance).

I currently have 71.08% in Domestic Stock, 24.11% in Foreign stock, and the rest (very little) in bonds, short-term, and other.

My categories look like this: 10.5% Large Value, 20.5% Large Growth, 9.25% Large Blend, 11% Mid-Cap Blend, 10.9% Mid-Cap Value, 10.7% Small Value, 11.2% Small Blend, 15.7% Foreign Large Growth.

How should I compare individual funds, though? If I have multiple funds to choose from in the same categories, what ought I be looking at to decide which ones to invest in?

[disneysteve]

How should I compare individual funds, though? If I have multiple funds to choose from in the same categories, what ought I be looking at to decide which ones to invest in?

That is always a tough question, especially when you are comparing funds within a fund family, like different Fidelity funds. I think the main decision is if you want index funds or actively managed funds. For index funds, the choice is pretty simple as each company usually has just one fund that tracks each index.

If you want actively managed funds, you need to look at not only the fund's performance history but the manager's performance history. The fund's 10-year average return isn't all that meaningful, for example, if the manager has only been there for 2 years. I'd say to stick to a fund with a manager who has been running that fund for at least 5-10 years. The longer the better. That way you know you're looking at performance numbers that he/she was actually responsible for.

[NetSkyBlue]

I'd say to stick to a fund with a manager who has been running that fund for at least 5-10 years. The longer the better. That way you know you're looking at performance numbers that he/she was actually responsible for.

How do I find out how long a particular manager has been running a fund? Most of the funds available to me list 1-3 managers, but I don't see a management history.

Secondly, should I opt not to invest in a new fund? Right now, there is one fund that holds a larger amount of my money than any other individual fund, and it shows an inception date of 2009. I believe they got rid of some fund at some point, and anybody who was invested in that automatically got invested into this fund if they didn't elect something else.

[snafu]

Another 2 cents...compare each of your MFs to it's comparable index. All to often fund managers fail to out perform their index. It translates to paying a higher MER [Management Expense Ratio] for Active Management that earns you less than the Index. Active management with feet on the ground in Third World countries is certainly adventageous as corruption is such a huge problem

[kv968]

I currently have 71.08% in Domestic Stock, 24.11% in Foreign stock, and the rest (very little) in bonds, short-term, and other.

My categories look like this: 10.5% Large Value, 20.5% Large Growth, 9.25% Large Blend, 11% Mid-Cap Blend, 10.9% Mid-Cap Value, 10.7% Small Value, 11.2% Small Blend, 15.7% Foreign Large Growth.

How should I compare individual funds, though? If I have multiple funds to choose from in the same categories, what ought I be looking at to decide which ones to invest in?

If you're looking at multiple funds in the same category one of the first things I'd look at (besides management) is the expense ratio. If they're all aiming for the same goal a lower expense could really help your return in the long run. Granted, that shouldn't be the ONLY factor in choosing a particular fund, but definitely a big consideration.

However if you're comparing similarly managed funds within the same fund family (i.e. Fidelity) the expense ratio shouldn't differ much. It's when you start looking across different fund families that you may really see a big difference.

As far as looking more indepth into the funds than just their returns and NAV, get the ticker symbol and go to Morningstar and plug it in. It'll give you a breakdown of sectors, weighting in those sectors, what the fund actually holds, management tenure and much more information than just basic returns. As far as the "star" rating they give a fund, well that's up to debate since that basically rates a fund on how its performed in the PAST. They just started a newer rating system for funds using gold, silver and bronze that's supposed to rate a fund on its probable future performance, but it's too early to tell how that'll work out and no can predict the future. You could take their ratings into consideration but don't rely on them.

[disneysteve]

Secondly, should I opt not to invest in a new fund? Right now, there is one fund that holds a larger amount of my money than any other individual fund, and it shows an inception date of 2009. I believe they got rid of some fund at some point, and anybody who was invested in that automatically got invested into this fund if they didn't elect something else.

The answer here is it depends. Sometimes the "new" fund isn't really so new and is just a repackaged fund that already existed. You need to do a little digging to find out for sure. Of course, the problem here is that you can't really look at the fund's track record if it has only been around for 2 years so as a general rule, I would stay away from those funds. I'd like to see at least a 10-year track record.

[NetSkyBlue]

Thank you, everyone. When I make my choices, should I leave the money I have in the funds where it is, and allocate any new money to go to my choices, or should I sell the ones I don't want and buy new? Is that going to cause me problems?

[NetSkyBlue]

And another question regarding the IRA - My yearly max contribution can only be $5k, and most of the funds I can choose from have a min initial investment of $2500. It kind of scares me to know I can only buy into, max, 2 funds a year and if I do that, lose any chance at dollar cost averaging.

What do most people do here? Should I spend the next few years buying into a number of funds, and once I get things diversified the way I like, start making smaller contributions across the board?

[disneysteve]

should I leave the money I have in the funds where it is, and allocate any new money to go to my choices, or should I sell the ones I don't want and buy new?

If you are happy with your funds and they are doing well, you can keep them. If not, dump them and move the money.

And another question regarding the IRA - My yearly max contribution can only be $5k, and most of the funds I can choose from have a min initial investment of $2500. It kind of scares me to know I can only buy into, max, 2 funds a year and if I do that, lose any chance at dollar cost averaging.

What do most people do here? Should I spend the next few years buying into a number of funds, and once I get things diversified the way I like, start making smaller contributions across the board?

That's a pretty standard hurdle to overcome. You just need to accept that initially, your account won't be as fully diversified as you'd like due to fund minimums.

Keep in mind that even investing a lump sum once per year still counts as dollar cost averaging when you continue to do that over a period of 10 or 20 or 30 years. Within a few years, you'll have enough in the account to spread it out nicely.

[jteezie]

These are all index funds, so manager performance isn't really an issue because the manager isn't making any active trading decisions like taking out leverage or weighting the portfolio with short positions. So, you should look more at diversification and expense ratios.

Lets look at how some funds are groups:
There are many ways that stocks are categorized. One is growth vs. value. In your portfolio, you have:

Large cap VALUE 10.5% and Large cap GROWTH 20.5% which is the same as 21% Large cap BLEND + 10% large cap growth
To simplify your portfolio, you could do 30.25% Large Blend (9.25 Large blend + 21 Large cap) + 10% large cap growth. Your portfolio is weighted toward growth companies.

Why might you care? Each fund might have a different expense ratio. You should find the ones with the lowest expense to maximize your return. More specialized strategies (i.e. Large Cap Value of only environmentally friendly companies) tend to have less investors, so to cover the cost of management, each person has to pay a little more per share, raising their expense ratio. Probably not the case with Fidelity funds, but possibly. Also, you might evaluate that you are a bit too heavily invested in large cap (40.25% of your portfolio).

When switching, you might want to consider ETF index funds as an alternative, but it depends how often you plan to buy in. Mutual fund let you contribute without commissions costs (though there may be taxes and other expenses that you may not be aware of that are pass down indirectly from contributions/redemptions/indirects). ETF's however, if held for a long run only have the commission costs. If you wanted to buy into many funds at smaller amounts and make annual contributions (yearly dollar cost averaging that disneysteve mentioned), ETF's might make sense. But if you plan to do monthly contributions, mutual funds might make sense because those contributions are at no cost. Plus if you regroup your investments like I showed above, you might only need to buy into 2-4 funds (enough to meet the initial contribution limit for all).

[elessar78]

FWIW

David Swensen manages Yale University's endowment and he wrote a book for the average investor. His whole point, despite going into 200+ pages of supporting data, is that it's hard (nearly impossible) for actively managed funds to beat the SP500 over a period of time.

According to Swensen, two factors affect fund performance more than others: management fees and taxes.

Index based funds (Total Market or SP500) have the lowest expense ratios because it's based on an existing index.

[kv968]

And another question regarding the IRA - My yearly max contribution can only be $5k, and most of the funds I can choose from have a min initial investment of $2500. It kind of scares me to know I can only buy into, max, 2 funds a year and if I do that, lose any chance at dollar cost averaging.

What do most people do here? Should I spend the next few years buying into a number of funds, and once I get things diversified the way I like, start making smaller contributions across the board?

Due to the lack of being able to invest in a number of funds when starting out an IRA, I normally suggest buying a retirement target date fund for diversification purposes. It gives you total diversification until you can build up enough money in the account to buy the funds you want tailor your allocation or you could just stick with it if you like it.

Another option would be to go to someone like T. Rowe Price instead where the initial investment is just $1000/fund or you could even go to Schwab and use their no-commission ETF's.

[ProjectX]

you should check out americanfunds too

When you leave your employer you don't have to roll over the 401k right away. You can roll over your money from your 401k to the new employer once you have set up the new 401k at the new employer, usually after a month of service.

[ecoadapt]

If you are happy with your funds and they are doing well, you can keep them. If not, dump them and move the money.

Directly stated. It's only making risk since you said at your age you're risk tolerance is pretty active then it's your decision! But,if I were to make that decision,I'll take the risk and move my money!

[snafu]

As mentioned, you have diversification via your existing MF. If you wish to change allocation, 1st decide your risk tolerance and 2nd if you wish Corporate Bond Fund, Dividend Fund, Value Fund, Small Cap Fund, International Fund, Emerging Market Fund etc.

Not yet mentioned, it's not an 'all or nothing' decision. You could sell a specific number of units from an existing MF to fund or partially fund another specific MF with the addition of your latest contribution.

If Dollar Cost Averaging is a goal, you can make arrangements to have a specific sum contributed automatically from your bank to a non retirement/regular investment account. Once a year transfer or sell the units to equal your $5000. allowable retirement contribution.

No one knows what changes in the economy will occur over the years until your retirement so just hold your nose and continue with your long term plan. Re-evaluate once a year - if the reasons you bought a specific MF are still valid there is no reason to sell and lock-in losses.