How To Pick A Good Mutual Fund

[scubatim84]

How To Pick A Good Mutual Fund | The Road To Wealth

Here is an article I wrote on how I believe one should go about picking a mutual fund that will provide you a good return. I apologize for it being a little lengthy but I think the examples that I provided between actively managed funds and index funds are worth the increased wordcount from including them in there. Enjoy!

[kv968]

Good article except for the "gross vs. net" returns. Returns shown on funds have the expense ratio deductions and 12b-1 fees factored in already. The percentage shown is the net return.

The only time you may see one with without an expense figured in is when there's a front and/or back-end load involved.

[disneysteve]

I agree with kv968. Your explanation of expense ratios is incorrect.

Also, your explanation of DCA is incorrect. You said:

instead of say buying $3,000 of shares every 3 months, buy $1,000 of shares each month

Both methods would constitute dollar cost averaging. DCA does not mean you have to buy every month. Buying every quarter is also DCA. Buying every 6 months is also DCA. The point is to buy a set dollar amount on a set timetable as opposed to investing in a lump sum.

[scubatim84]

Thanks for pointing that out about the gross vs. net return. This has been corrected.

Also, I disagree about DCA. Yes, you can claim that buying in any frequency is DCA versus buying a set amount. Still, I fail to see how DCA is working if you're just buying huge chunks of stocks every 3 or 6 months. This is not what the idea of DCA is about. Stocks fluctuate so much that you could easily be buying huge lots of stocks every 3 or 6 months when the market happens to be peaking on those particular days. It's misleading to the reader to suggest DCA would work with such little frequency when in reality it probably won't.

[disneysteve]

Also, I disagree about DCA. Yes, you can claim that buying in any frequency is DCA versus buying a set amount. Still, I fail to see how DCA is working if you're just buying huge chunks of stocks every 3 or 6 months. This is not what the idea of DCA is about.

The point of DCA is to not try to time the market, to not try to pick the "best" time to buy and go all in because odds are good that you'll guess wrong. Investing a set amount on a set schedule, whether it is weekly, monthly or quarterly avoids that issue. Quarterly DCA is perfectly reasonable and something a lot of people actually do.

[scubatim84]

The point of DCA is to not try to time the market, to not try to pick the "best" time to buy and go all in because odds are good that you'll guess wrong. Investing a set amount on a set schedule, whether it is weekly, monthly or quarterly avoids that issue. Quarterly DCA is perfectly reasonable and something a lot of people actually do.

Well, I'm sure that works just fine in less unstable market conditions, but I definitely would not want to do any duration longer than monthly last year or this year...the market has had a serious case of bipolar disorder ever since the Euro crisis started.

[jIM_Ohio]

You missed on lots of points, and failed to mention many other relevant facts. Posts like this are job security for people like me.

The single biggest thing you should consider when picking a mutual fund is the cost.

The single biggest factor to consider is the GOAL of the investment. I would not invest the same way when saving for a house as I would when saving for retirement.

What is the cost to buy shares (front or back end load charges) or sell shares (redemption fees)? Are there any hidden fees such as 12b1 fees? Is there a redemption fee for selling shares within a certain time period? Good funds don’t have any of these,

Too many data points to debate this. If someone wanted an ultra aggressive fund, which one would you recomend? If someone wanted a good market neutral fund, which one would you recommend? The best two funds, IMO, are load funds, but if you know what you are doing, you can get them with loads waived.

Index funds, by the nature of how the S&P 500 and Wilshire 5000 indices are weighted, are primarily large cap funds since the index tracks the 500 or 5,000 largest companies.

Weighted how?
and the wilshire 5000 is not the 5000 largest companies, make sure you get that right...

Now that we’ve established why index funds are safer, more diverse, and better long-term investments

Index funds are safer? Job security for me.

Dollar Cost Averaging (DCA). Granted, to get started with a mutual fund, you will need to buy $2,000 or $3,000 or whatever the account minimum is to get the fund going. However, once the fund is established, how should you make contributions? The one proven method of increasing return is to dollar cost average.

DCA means invest regularly. History shows that investing lump sum is better, especially when looking at 30 year periods (will it matter much if there were 12 $1000 contributions or one $12000 contribution in 30 years?). DCA is used to make investing affordable and predictable, not to handle minimums (T Rowe Price waives fund minimums if you DCA).


When investing in known spaces (large cap domestic, large cap foreign, corporate bond and government bond), indexing is a good technique because most variables are known. There is a known value bias, so its important to realize value investing beats using an S&P 500 index using past performance.

In small cap, mid cap and emerging market space, fund managers matter. They can seize opportunity more than an index could ever hope for (what index do you recommend for emerging markets, microcaps or junk bonds?).

You missed the boat, keep swimming.

I would focus on the following

What is the goal?
What is the risks you are willing to take to achieve the goal?
Who has custody of your money?
What fees are paid by whom to achieve all of the above?

[jIM_Ohio]

The point of DCA is to not try to time the market, to not try to pick the "best" time to buy and go all in because odds are good that you'll guess wrong. Investing a set amount on a set schedule, whether it is weekly, monthly or quarterly avoids that issue. Quarterly DCA is perfectly reasonable and something a lot of people actually do.

Over 30 years, will it matter if you had 360 entry points or 30 entry points or 1 entry point?

DCA is because most people cannot invest a lump sum of $360,000, so $1000 360 times is what needs to work because its what they can do.

[jpg7n16]

Also, I disagree about DCA. Yes, you can claim that buying in any frequency is DCA versus buying a set amount.

It's not a "claim" it's a definition.

Dollar-Cost Averaging (DCA) Definition | Investopedia

It's the technique of buying a fixed amount at regular intervals.

Still, I fail to see how DCA is working if you're just buying huge chunks of stocks every 3 or 6 months. This is not what the idea of DCA is about. Stocks fluctuate so much that you could easily be buying huge lots of stocks every 3 or 6 months when the market happens to be peaking on those particular days. It's misleading to the reader to suggest DCA would work with such little frequency when in reality it probably won't.

As long as you are buying the same dollar amount chunk, then you are DCA-ing. The size of the chunk doesn't matter, just that it's the same each time.

The fluctuations of the market are exactly why DCA exists. You invest the same amount each month/quarter/year which buys you less shares when prices are high and more shares when prices are low.

You never know when the market will peak or trough. But DCA doesn't worry about that.

It is just a strategy to buy a fixed amount on a fixed interval. It's not a perfect strategy, but it's very good for a long term investor who has money to invest each month.

[kv968]

DCA means invest regularly. History shows that investing lump sum is better, especially when looking at 30 year periods (will it matter much if there were 12 $1000 contributions or one $12000 contribution in 30 years?). DCA is used to make investing affordable and predictable, not to handle minimums (T Rowe Price waives fund minimums if you DCA).

Would it matter much if there was just one contribution vs. 12 over 30 years? It could matter a whole lot.

If I stuck all my money in the S&P (granted not completely diversified but just as an example) in Oct '07 I'd be down ~12% right now. Had I stuck that contribution in in Feb of '09 I'd be up ~84%. Sure it's not 30 years out but that's a big hurdle that you won't overcome.

And T Rowe Price doesn't waive the fund minumums anymore even with DCA'ing. There's a $1000 minimum for most of them.

[jIM_Ohio]

Would it matter much if there was just one contribution vs. 12 over 30 years? It could matter a whole lot.

If I stuck all my money in the S&P (granted not completely diversified but just as an example) in Oct '07 I'd be down ~12% right now. Had I stuck that contribution in in Feb of '09 I'd be up ~84%. Sure it's not 30 years out but that's a big hurdle that you won't overcome.

And T Rowe Price doesn't waive the fund minumums anymore even with DCA'ing. There's a $1000 minimum for most of them.

I posted about 30 years, then your example used a 5 year interval. I am 50%+ higher now than I was in 2008 when I lost 40%, in my personal accounts.

If investing over 30 year periods, will it matter if you had 12 $1000 contributions in 2008, or one $12,000 contribution at beginning of 2008, or that same contribution at beginning of 2009? If past performance is any indication, in 2039 it will not matter.

[scubatim84]

You missed on lots of points, and failed to mention many other relevant facts. Posts like this are job security for people like me.




The single biggest factor to consider is the GOAL of the investment. I would not invest the same way when saving for a house as I would when saving for retirement.



Too many data points to debate this. If someone wanted an ultra aggressive fund, which one would you recomend? If someone wanted a good market neutral fund, which one would you recommend? The best two funds, IMO, are load funds, but if you know what you are doing, you can get them with loads waived.



Weighted how?
and the wilshire 5000 is not the 5000 largest companies, make sure you get that right...



Index funds are safer? Job security for me.



DCA means invest regularly. History shows that investing lump sum is better, especially when looking at 30 year periods (will it matter much if there were 12 $1000 contributions or one $12000 contribution in 30 years?). DCA is used to make investing affordable and predictable, not to handle minimums (T Rowe Price waives fund minimums if you DCA).


When investing in known spaces (large cap domestic, large cap foreign, corporate bond and government bond), indexing is a good technique because most variables are known. There is a known value bias, so its important to realize value investing beats using an S&P 500 index using past performance.

In small cap, mid cap and emerging market space, fund managers matter. They can seize opportunity more than an index could ever hope for (what index do you recommend for emerging markets, microcaps or junk bonds?).

You missed the boat, keep swimming.

I would focus on the following

What is the goal?
What is the risks you are willing to take to achieve the goal?
Who has custody of your money?
What fees are paid by whom to achieve all of the above?

Ohio, the fact that all you do is claim my article is terrible, and throw out facts that neither have any validity or proof to back them up, leads me to believe that you're one of those financial advisors who makes their living preying on the uninformed. I'm alarmed that you would claim indexing is a joke, DCA is pointless and going for load funds is somehow a good idea. Yes, I can see through the smoke and mirrors, but I think it's irresponsible on your part to try to mislead other people with your own twisted view of investing. I understand that it may be "job security" for you but for others it translates into the destruction of their retirement.

People like you are why I wrote that article in the first place...there's too much poor information out there on investing. Thanks for driving that point home though.

[jIM_Ohio]

Ohio, the fact that all you do is claim my article is terrible, and throw out facts that neither have any validity or proof to back them up, leads me to believe that you're one of those financial advisors who makes their living preying on the uninformed. I'm alarmed that you would claim indexing is a joke, DCA is pointless and going for load funds is somehow a good idea. Yes, I can see through the smoke and mirrors, but I think it's irresponsible on your part to try to mislead other people with your own twisted view of investing. I understand that it may be "job security" for you but for others it translates into the destruction of their retirement.

People like you are why I wrote that article in the first place...there's too much poor information out there on investing. Thanks for driving that point home though.

Wow, bring it on.

The primary investments in large cap space I use are index ETFs from Vanguard.
In the small cap space and emerging markets space, managed funds do better.
What investment would you pick for an aggressive approach? The best one I know is a load fund. If you know of a better single pick to be aggressive (high beta), please let me know.
At same time I know of a fund which invests in convertibles and sells puts, but its a load fund without any comparisons in the no load universe.

And your ignorance shows, because I am a FEE ONLY advisor, which means all loads are waived to begin with. I only collect one fee, and that fee is transparent and declared up front.


Idiots like you are job security for me. My clients are informed investors. Not everyone takes the time to learn the details about how to invest, so it is better for those people to hire someone than to take the 120-240 hours to educate themselves on all the facts.

My single issue with your post is you painted a broad picture using "always"- always index, always no load, always etc... and that will get you into a trap.

Because I tell clients if they hear the words always, never, guaranteed or risk free to run the other way fast.

[kv968]

I posted about 30 years, then your example used a 5 year interval. I am 50%+ higher now than I was in 2008 when I lost 40%, in my personal accounts.

If investing over 30 year periods, will it matter if you had 12 $1000 contributions in 2008, or one $12,000 contribution at beginning of 2008, or that same contribution at beginning of 2009? If past performance is any indication, in 2039 it will not matter.

If you were to invest in SPY with a lump sum in the beginning of '08 and '09, your cost basis would be about $118. Had you invested $1000 per month during the same 2 year period your cost basis would be $110 ($126 for '08 on average and $93 for '09). That's a difference of 7.3% just for those two years. Sure it won't make a HUGE difference 30 years later, especially if you're constantly contributing, but it's also a 7.3% difference you won't make up.

I just feel DCA'ing more frequently than once a year will provide better (maybe not much, but better nonetheless) returns in the long run. Not even necessarily monthly but at least quarterly. Especially with the volitility in the markets today, it's hard to say when you'll hit the highs or the lows and, to me, doing it just annually you're limiting your chances.

If you have any articles or studies on DCA'ing time frames I'd like to read them if you can pass them along.

[scubatim84]

Wow, bring it on.

The primary investments in large cap space I use are index ETFs from Vanguard.
In the small cap space and emerging markets space, managed funds do better.
What investment would you pick for an aggressive approach? The best one I know is a load fund. If you know of a better single pick to be aggressive (high beta), please let me know.
At same time I know of a fund which invests in convertibles and sells puts, but its a load fund without any comparisons in the no load universe.

And your ignorance shows, because I am a FEE ONLY advisor, which means all loads are waived to begin with. I only collect one fee, and that fee is transparent and declared up front.


My single issue with your post is you painted a broad picture using "always"- always index, always no load, always etc... and that will get you into a trap.

Because I tell clients if they hear the words always, never, guaranteed or risk free to run the other way fast.

Bring it on? Wow, what is this, a grade school recess fight? I'm going to tell you up front that I'm not going to waste a lot of time with you since there appears to be only 1 adult in this conversation and I'm not interested in this childish bickering. Also, the fact that you are a financial advisor pretty much says it all...fee or no fee, you're a salesperson and you will obviously say anything to get the sale. Sure, you only get paid a fee, but if you can't steer clients into index funds then why not throw some other garbage in front of them so you can still get that fee huh?

At any rate, again you haven't put up any documentation whatsoever on your claims, especially the claim that managed funds do better. Am I supposed to just believe you? That doesn't seem very interesting. As a contrast, I /did/ look up the historical performance of the stock indices, as well as some managed funds, and put the links up on my article for all to see. With the exception of one fund, they all lagged significantly. I wonder how many funds you sold to clients which later closed or were merged into other funds because their performance was so terrible.

An "aggressive" portfolio should simply change the composition of stocks to bonds...IE 75% stocks, 25% bonds as opposed to a 50/50/ split. Running into managed, load funds and chasing a specific sector or type of fund like emerging markets is definitely job security for you, but for most people, unless they get incredibly lucky this sector chasing will just leave them in ruin.

Idiots like you are job security for me. My clients are informed investors. Not everyone takes the time to learn the details about how to invest, so it is better for those people to hire someone than to take the 120-240 hours to educate themselves on all the facts.

See, this is the kind of childish garbage which is why I'm not going to waste a lot of time on you. I'm not going to get into a name calling spat with someone who is clearly only interested in misleading investors, and defrauding their retirement portfolios, simply to enrich themselves. Your statements don't even make sense. Your clients are informed investors, which is why they need you, because they're not educated on investments enough to do it themselves? I see. The only other gem I'll leave you with is that your clients would have been far better off spending the 120-140 hours to educate themselves. Better that than leave their future in the hands of people like you.