How To Pick A Good Mutual Fund

[disneysteve]

Ok folks, moderator Steve here. Let's stop the name calling and insults. I've been here long enough to greatly respect Jim's input and training. scubatim84, you're fairly new here so you don't have that background.

Jim, please skip the personal attacks and, if you are legally permitted to do so, how about sharing some specifics of what you are referring to. Certainly, there are load funds that outperform no-load funds. I invest in a couple myself, but also through an account in which I don't have to pay the loads. So scubatim84, keep that in mind. Just because a fund has a load doesn't mean that everyone who invests in that fund pays that load. If you want the best fund in a category, don't automatically rule out managed funds and don't automatically rule out load funds. Do your homework.

Of course, not everyone has the time, interest or knowledge to do the necessary research, and that's where professionals come in. As with any occupation, there are good, ethical, responsible individuals and there are others who will do anything for a buck. Financial advisers definitely have a bad reputation as a whole because of the bad eggs who are little more than salesmen. That doesn't mean the good guys aren't out there.

[bjl584]

I'm with Steve.

Everyone, please feel free to disagree with each other. Just stick to topic and avoid getting personal.

[jIM_Ohio]

I won't mention the high beta fund I refer too, as that could be construed on the internet as a recommendation, and I cannot do that. I have looked, and I know of 2 funds by sister fund families which are high beta, they are load funds, and I have not seen anything comparable on no load side.

Adding Beta is the value an advisor brings to table- building a robust stock-bond portfolio is where it starts, but the volatility of the market lends itself to adding some beta with a portion of portfolio. This way rebalancing allows more buying low, and more selling high.

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.

Not true. How about puts, calls, options and leverage? Short selling? There is more to aggressive investing than % stocks and % bonds. This is why accredited investors like hedge funds. Emerging markets are an asset class, not a sector. A sector is health care, technology, consumer durables and others. Emerging markets are a region, and because global investing is part of portfolio, emerging markets are one of the asset classes/regions used.

One of the best performing funds in my portfolio over last 15 years is a managed small cap foreign fund. Most here will know my no load family of choice already.

There are funds which combine convertibles with short selling. This is an income strategy- how would you do this with a no load fund?

In one of the posts, it suggests investments are picked before the fee is paid, and that is not true- every client of mine has hired me to pick their investments, and no one has ever asked what each fund is invested in, those decisions are made when client is not in the room. Clients are paying for my advice and time because they don't want to take the time. They are educated enough to know they don't want to learn more. And a clients time is valueable, it is MUCH more important for me to know how much risk a client can take, what their goals are, what their life is like, and what other things are going on which should influence my investment decisions. Time with a client is not spent discussing index vs managed for more than 1 minute. It is about them, not me (they are hiring me to make the selections for them), so the time is spent with them getting to know me, and me getting to know them.

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?

I don't have to sell anything. People see value in me spending 8-24 hours per year on their portfolio. I see poor performing portfolios all the time (like 2% returns over 10 years) and most people see the value in paying 1% to increase that return.

At any rate, again you haven't put up any documentation whatsoever on your claims, especially the claim that managed funds do better.

Your claims used the words always, never and similar, so your claims are not right either.

My philosophy has generally been to use managed funds, and I have been doing so for the last 15 years with my own money. I do believe in keeping costs down, and in large cap space I know of 3 significant biases that your traditional S&P 500 index cannot take into account.

1) Dividends
2) Mid caps do better return wise
3) There is a management team picking the S&P 500 stocks even though it is an "index" (the management team works for the S&P, not the investor).
4) The S&P 500 makes royalties on any fund which uses their index, so anyone preaching indexing is actually advertising for someone without knowing it. This is biased advice from where I sit.

In large cap space, I used 4 different indexed ETFs. In foreign and small cap space, I use managed funds. I have moved my money into indexed ETFs for large cap space since I started at my current firm so I am aligned with clients.

The ETFs have different passive criteria than the S&P, and this makes them better, none of the ETFs have the 30 year track record to prove it yet, though. The data does exist though, I have read it somewhere, and it passed my BS filter the first time through.


There are 3 types of financial advisors

Transactional
Fee Based
Fee only

The above describes how they are paid
it does NOT describe the investments picked.

A load fund could be used in all 3 situations, but the load is actually only paid in a transactional relationship.

Transactional means commissions, 12b1 fees and loads are paid. Advice only comes on the transaction itself, so it is tough to see big picture or get objective advice. The legal standard is suitable (is the advice suitable for the client).

Fee Based means a fee is charged to portfolio, the advisor reserves the right to collect 3rd party fees and commissions. For example an advisor which sells a variable annuity in this format collects a commission from insurance company, so the fee based advisor receives a 3rd party fee. The key to understanding fee based is think 3rd party. If a third party pays the advisor, then the advice given to client is paid by the third party, so advice is not objective, the legal standard here is the investment must be suitable for the client.

Fee-only means the compensation and advice are NOT linked. The fee is transparent (for example 1% of assets). There are 5 different fee models listed on NAPFA web site for example, 1% of assets is most common, there are other methods with hourly rate, retainer, or % net worth as well. Fee-only means whether an annuity, whole life or stock-bond mix is used, the compensation does not change based on advice rendered. The legal standard here is fiduciary, which is much higher than suitability. Fiduciary means advice must be in clients best interest at all times.


This is important to know because how investments get picked in each category can be different. And the fees paid in each are different even if same mutual fund is used.

Transactional advisors will probably use load mutual funds. The load is the compensation on the investment.
Fee Based advisors might only use no-load funds, but at same time they are allowed to use load funds (and waive the load), and collect 12b1 fees. If you see a broker dealer you have never heard of, I would bet it is a fee based advisor.

Fee only advisors will be paid the fee (1% for example). Most fee only advisors will use no load funds at a large brokerage like Schwabb, Fidelity or TD Ameritrade (those are the big 3 brokers which cater to fee-only advisors). If there is a load fund used, the load is waived. If there is a 12b1 fee, it is not paid to the advisor.


Index vs Managed
I do not have the study handy, however there is empirical data to suggest small cap stocks outperform large caps over time. That same data suggests mid caps do better risk adjusted than small caps. An index like the wilshire 4500 would invest in 5000+ stocks to capture this, I choose to use managed funds here because it does not take 5000 stocks to be diversified- it might take 200-600. So picking 1-3 fund managers which each use different styles to fill in this asset class makes more sense to me.

[kv968]

In one of the posts, it suggests investments are picked before the fee is paid, and that is not true- every client of mine has hired me to pick their investments, and no one has ever asked what each fund is invested in, those decisions are made when client is not in the room. Clients are paying for my advice and time because they don't want to take the time. They are educated enough to know they don't want to learn more. And a clients time is valueable, it is MUCH more important for me to know how much risk a client can take, what their goals are, what their life is like, and what other things are going on which should influence my investment decisions. Time with a client is not spent discussing index vs managed for more than 1 minute. It is about them, not me (they are hiring me to make the selections for them), so the time is spent with them getting to know me, and me getting to know them.

Even though no one has asked you what fund is invested in (which I personally find frightening), do you at least offer to explain what you're investing in and why? I know you don't have to get into all the nuances of the what and how, but I think at least a basic overview of what you're doing and trying to accomplish would be appropriate.

I've helped many of my friends, family and co-workers with their 401k's, IRA's and other investments and I'd have to say at least probably half of them just basically throw up their arms and say "do whatever you want with it" and want nothing to do with it. Although I feel that's not really the right attitude for them to have, I also realize that they don't want to be "bothered" with it nor care to learn about it. I don't particularily agree with that type of approach but I totally understand it.

However, even in those instances, I try my best to explain to them what it is they're investing in and how it may perform in certain scenarios. Granted you have to do all of this before they "glaze" over, but I try to keep it short and simple so they at least know, whether they really want to or not, where their money is.

I understand that it's more about the person and their situation than the specific investments, but I would hope as a financial advisor you'd at least tell them how their money is invested and why regardless of if they care or not.

[jIM_Ohio]

Even though no one has asked you what fund is invested in (which I personally find frightening), do you at least offer to explain what you're investing in and why? I know you don't have to get into all the nuances of the what and how, but I think at least a basic overview of what you're doing and trying to accomplish would be appropriate.

I've helped many of my friends, family and co-workers with their 401k's, IRA's and other investments and I'd have to say at least probably half of them just basically throw up their arms and say "do whatever you want with it" and want nothing to do with it. Although I feel that's not really the right attitude for them to have, I also realize that they don't want to be "bothered" with it nor care to learn about it. I don't particularily agree with that type of approach but I totally understand it.

However, even in those instances, I try my best to explain to them what it is they're investing in and how it may perform in certain scenarios. Granted you have to do all of this before they "glaze" over, but I try to keep it short and simple so they at least know, whether they really want to or not, where their money is.

I understand that it's more about the person and their situation than the specific investments, but I would hope as a financial advisor you'd at least tell them how their money is invested and why regardless of if they care or not.

Investing is not one size fits all- the blog post which started this thread is a great example of a person which says "only do this", "always do this" and "never do this".

The key to making decisions for other people is to KNOW the person. Know their goals. Focus on their behavior, see what problems or concerns they have.

If how I rebalance is important, I explain that.
If what types of investment is important, I explain that.

I have stated I use Vanguard index funds to about 2/3 of my clients, I think about 1/3 of them cared based on facial reaction and body language. All of the clients were more concerned with fees, goal setting and the firm I work for. And 401k this or IRA that or RMD this and aggressive vs moderate risks that.

Providing guidance to other people is more along lines of listening to them, and not telling them what the speaker believes they need to hear. That is why when you help friends they put their arms up- you are telling them what you want to tell them, if you focus on listening to their concerns and solving their problems, you might find experience more rewarding.

[disneysteve]

Providing guidance to other people is more along lines of listening to them, and not telling them what the speaker believes they need to hear. That is why when you help friends they put their arms up- you are telling them what you want to tell them, if you focus on listening to their concerns and solving their problems, you might find experience more rewarding.

I see your point but don't you then run the risk, if performance takes a downturn, of those very same people coming back and saying, "Why didn't you tell me where the money was invested? I never would have gone along with that plan had I known?"

I'm assuming that you do give your clients some type of report that shows a breakdown of the portfolio holdings, right?

[kv968]

Investing is not one size fits all- the blog post which started this thread is a great example of a person which says "only do this", "always do this" and "never do this".

I totally agree.

The key to making decisions for other people is to KNOW the person. Know their goals. Focus on their behavior, see what problems or concerns they have.

Providing guidance to other people is more along lines of listening to them, and not telling them what the speaker believes they need to hear. That is why when you help friends they put their arms up- you are telling them what you want to tell them, if you focus on listening to their concerns and solving their problems, you might find experience more rewarding.

Well I definitely know these people since I've worked with or have known some of them for decades. Although there's still the need to get to know their financial mindset better which I attempt to do.

I do listen to them and their concerns but I also DO tell them what they need to hear. Not what they want to hear, but what they NEED to hear. Some of them, especially the older folks, are locked into their saftey/comfort zone of investment allocation that they've had for years and are scared to move from that even when everything about the situation dictates that they should. Some, dare I most, don't even really know what they're allocation is or why they set it like that in first place but still balk when I suggest changing it. For example, I have one guy who's in his mid-50's with 100% company stock feeling that's the safest, or at least most comfortable, place to be. I've tried explaining to him the risks he's taking but he just wants to "let it ride". It's kinda of hard, if not impossible, to get through to some one like that. But then again he's never asked for any sort of help so he thinks he's doing ok which is fine by me. I've just, in conversation, laid out the pitfalls to him and let him do with it as he may.

Regardless, with the ones I have helped, I've listened to what they want and need and in doing so I suggest what funds I think they should be in, but I also tell them the reasons why. I'm not their official "financial advisor", although none except one have one, so it's ultimately their decision on what to do. I just try to do my best at describing what they're in, what I think they should be in and how each fund invests and how it may perform in different economic environments. Most don't care, but I feel that if they're willing to trust me to help them then it's my obligation to at least explain to them in the simplest terms I can, what it is they're investing in.

[jIM_Ohio]

I see your point but don't you then run the risk, if performance takes a downturn, of those very same people coming back and saying, "Why didn't you tell me where the money was invested? I never would have gone along with that plan had I known?"

I'm assuming that you do give your clients some type of report that shows a breakdown of the portfolio holdings, right?

I ask every client what they would do if market went down 30% in 6 months. If their reaction suggests sell, then equity exposure is minimized.

Every month the custodian sends a statement, every quarter my firm sends a more comprehensive statement.

Custodian shows assets, we show allocation, aggregate accounts (for example show 401k at one custodian and IRA at another custodian on same statement), and holdings on the firm quarterly statement.

[jIM_Ohio]

I totally agree.



Well I definitely know these people since I've worked with or have known some of them for decades. Although there's still the need to get to know their financial mindset better which I attempt to do.

I do listen to them and their concerns but I also DO tell them what they need to hear. Not what they want to hear, but what they NEED to hear. Some of them, especially the older folks, are locked into their saftey/comfort zone of investment allocation that they've had for years and are scared to move from that even when everything about the situation dictates that they should. Some, dare I most, don't even really know what they're allocation is or why they set it like that in first place but still balk when I suggest changing it. For example, I have one guy who's in his mid-50's with 100% company stock feeling that's the safest, or at least most comfortable, place to be. I've tried explaining to him the risks he's taking but he just wants to "let it ride". It's kinda of hard, if not impossible, to get through to some one like that. But then again he's never asked for any sort of help so he thinks he's doing ok which is fine by me. I've just, in conversation, laid out the pitfalls to him and let him do with it as he may.

Regardless, with the ones I have helped, I've listened to what they want and need and in doing so I suggest what funds I think they should be in, but I also tell them the reasons why. I'm not their official "financial advisor", although none except one have one, so it's ultimately their decision on what to do. I just try to do my best at describing what they're in, what I think they should be in and how each fund invests and how it may perform in different economic environments. Most don't care, but I feel that if they're willing to trust me to help them then it's my obligation to at least explain to them in the simplest terms I can, what it is they're investing in.

Obviously if you need to educate the person to hit the buttons, you need to "preach" more (I don't mean this in a bad way). This is probably the difference between doing it for free and getting hired. Most people in those situations want someone else at the controls, not themselves.

I like to focus on human behavior. As long as I can guide or predict the behavior pattern, then the relationship is solid.

[kv968]

Obviously if you need to educate the person to hit the buttons, you need to "preach" more (I don't mean this in a bad way). This is probably the difference between doing it for free and getting hired. Most people in those situations want someone else at the controls, not themselves.

I like to focus on human behavior. As long as I can guide or predict the behavior pattern, then the relationship is solid.

Oh I do my fair share of "preaching" when needed

The difference, at least for me, between doing it for free as opposed to being hired is I don't have the time to properly monitor everyone's holdings. I'd say a majority of the people would want me to just take over their accounts (I've even had some give me their log-on information) but I don't have the time to do all of them justice and I'm not properly licensed to do so. Although I've been thinking of going for the Series 65 and 6. I'd like to take the 66 and 7 but I'm not in a position where I could be sponsored.

So, I just try to set them up, explain what everything is and try to get back to them periodically to make sure everything's going well and see if any rebalancing is needed.

[disneysteve]

The difference, at least for me, between doing it for free as opposed to being hired is I don't have the time to properly monitor everyone's holdings.

I'm the same way. That's why here at this site, I generally stick to general saving and investment advice and almost never weigh in on specific investments or individual portfolios.

[kv968]

I'm the same way. That's why here at this site, I generally stick to general saving and investment advice and almost never weigh in on specific investments or individual portfolios.

I like to throw out my opinion about portfolios and specific investments here and enjoy the back and forth of different ideas and aspects. However I usually try and keep it kind of general as I don't know all the particulars about a person's situation.

As far as what I do for the people I've personally helped, it's kinda hard. I try to give them an allocation that isn't an "in the moment" one that might have to be tweeked in the next year or so since I doubt they'll do it. I have to try to set almost everything up as a kind of "set it and forget it" allocation since I'm sure that if I don't remind them about it they will forget it.

What I usually try to do is at least set up the automatic rebalancing that's available for them since I know they most likely won't do it themselves. I wish I could do more for them because I really enjoy it but unfortunately the time factor won't let me. I do have a couple of people at work plus my gf and family members that I'm more hands-on with but I can't do that with everyone.

Although I can say, for a majority of those that I've helped, I think their allocation is A LOT better than what it was. But then again, with some of them, the bar was set pretty low in that aspect to begin with.

[Kundan Lal Rana]

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!

Great article! Thanks for sharing.