A layman’s guide to managing your workplace retirement accounts. Part 4 Choosing a mutual fund.
UPDATE 3/22/17: I no longer move my money between a mutual fund and a money market account based on market conditions. It proved to not work as well as intended, and added more time to my already busy schedule. I intend, at some point, to find a better system for that strategy. I buy and hold the best fund available currently. I do monitor to make sure I am still in that fund, but I no longer rotate my money.
However, the rest of the guide which details how to choose a fund is still very relevent and useful.
In this blog post I will be trying to help you make a decision on what fund would be best for you. Keep in mind two things here. One, this part of the guide is not as important as the previous post. I have stated this already but I want to reiterate it. Secondly, it is impossible for me to make this decision for you, you must make it for yourself. I do not know every nuance of your financial decision nor do I want to know. You must do the research yourself and make your own “pensive” decision.
Stick to one
One thing to avoid if possible. This is my opinion, but I think it is grounded in a fair bit of reality. Try to focus on one fund if possible. You do not need to spread your account across 5 funds. This does not necessarily make you more diversified. Keep in mind what a mutual fund is. It is a collection of 10s if not 100s of stocks. It is already diversified.
Now, to fund selection. I’m sure many of you have heard the disclaimer that past performance is not indicative of future results. Well to me past performance is the best measure of how good the fund manager is. Now when I say past performance, I generally am most concerned with the 3–5 year performance. Anything less than a year is not that big of a concern to me. Markets change, and the best idea of how a fund is doing is the 3–5 year time period. Longer than that and you might be looking at either a prior fund manager’s history or a completely different market environment.
Most retirement accounts will have some research tools that will show you performance data. Find the write down the the top 5 for every time period one year or longer. Circle the names that appear twice. Asterisk the ones that appear three times or more. The asterisked list is a very good starting point.
Get into the details
From there, get into the nitty gritty of each of these funds. Has the fund manager changed recently? If so what is the track record of the new fund manager? Where did the new fund manager go and can you buy that fund? What is the Morningstar rating of the fund? Google search the find and see if you can find any professional reviews. Be skeptical of any reviews, but try to dissect the good articles from the sales pitches.
That is the basic idea and if you do these things you will be ahead of most people. I would throw an arbitrary statistic at you like most people do such as 90%, but that would be a made up statistic.(As most statistics undoubtedly are. I am always skeptical of any statistic that is 90% or above as that is often the number chosen out of thin air as it seems to substantiate claims to a greater degree.) I digress.
Take it to another level
If you want to get more advanced there are other things you can consider. Are we early in a bull market run? Small caps and value stocks tend to perform better. Later in the run growth stocks come into play. Large caps tend to be the best performers late in a bull run. Large caps in the long run underperform small caps. The long term performance of growth versus value is highly debated, but I am more in the growth camp so you know where I stand.
Your age and your risk tolerance are also a consideration. Do fill out the investor profile if your account has one, and see what it recommends for you. Do not let it make the decision for you, but the process of doing things will teach you a bit about your options. Performance is the most important thing, so always keep that as your primary factor.
If you want to know more ask me in the comments or send me an email. Read books such this classic from John Bogle, Common Sense of Mutual Funds. Bogle advocates index funds over mutual funds as they tend to outperform mutual funds. Sadly, many retirement accounts do not have access to index funds. I still think if you do the research you can find one of the 20%(arbitrary statistic) of funds that beats index funds.
Read other blogs such as one of my favorites Stockbee. His “lemonade” strategy is part of the inspirations for this strategy. Here are a couple of the posts on this strategy:
Again, do your own research and come to your own conclusions. Take charge of your finances instead of letting other, often times unscrupulous, “professionals” make your financial decisions for you.
Other posts in the managing your workplace retirement accounts series:
Originally published at Speculate Freedom.
