MonthFebruary 2017

Buying Mutual Funds (A few simple rules)

Investing in mutual funds is a great way to get a balanced portfolio that is professionally managed at a predictably low cost. It’s important to note that all mutual funds are not even close to equal and caveat emptor is the guiding principal. Fortunately, there are a few simple rules that you can follow to separate the good from the bad. I am focusing this blog post on open ended equity mutual funds because the rules are different for other types of mutual funds like bond funds or closed ended funds.

For equity funds you need to decide what is important to you from an investing strategy standpoint. If protection of principal is your most important criteria for an investment, don’t invest in equity mutual funds. Investing in equities means that your funds will rise and fall. If you can’t stomach a 10% decline in your principal, then stay out of these funds. If you like risk and know certain industries, then focused funds may be part of the portfolio mix. As long as you diversify along the industry lines rules 1-4 still can be followed.

The criteria that I used to select a mutual fund are as follows:

  1. Has the fund earned at least 10% on average for both the last 5 years and the last 10 years?
  2. The fund manager has not changed for the last 5 years.
  3. The expense ratio is less than 1% and the fund is a no load fund.
  4. The fund has a Morningstar ranking of 4 or 5 in all categories.
  5. The fund is not industry focused.

It should be noted that my criteria excludes several of the generally recommended options that are used to manage risk in a retirement portfolio. Specifically, I don’t like bonds or “low risk” equities. The table below will help you understand why. The American Fund at the top of the table is your typical “low risk” mutual fund. It invests in bonds and stocks based on their view of the market direction and operates on very low expenses. The remaining 3 funds in the table below all meet my criteria. It should be noted that I spent 15 minutes on the search that pulled up these funds so proving my point is not very difficult. The chart below shows the value of a $10,000 investment made in each fund in January 2007. During the 2009 -2010 market meltdown all 4 of the funds lost almost the same 30% of their value as noted by the point on the chart circled in red. However; if you look at the results after holding the funds for 10 years, the low risk fund returned 65% while the funds that followed my selection criteria returned between 250% and 300%. That’s $25k to $30k for high risk investments versus $16k for the low risk investment with the exact same jaw dropping performance during the market meltdown.

If you invest in equity mutual funds, you do need to watch them. I recommend that you look at their performance versus the market at least monthly. If they are falling well short of the S&P 500 results, then you should consider moving to another fund. Every 6 months you need to confirm the Morningstar rating and the fund manager. If there is a change, then it’s time to find another fund.

There is a lot of discussion about diversification in investments from the professionals. Diversification is the spreading of your investments across a wide range of industries and companies. If you are in individual stocks, it’s really important. In mutual funds, you don’t need to diversify because the fund is diversified already. You might want to go into a couple funds if you have a 6 figure investment just to diversify on managers, but it not essential. As you can see from the above chart, if you follow my rules, the results will be similar.

So if you are ready to invest in an equity mutual fund, you will need a screener. I have our money in Fidelity, so I use their screener. If you need to find one go to:

It works well. No investment is forever and no fund manager is perfect. There are many funds to choose from and you want to get the best return you can from your hard earned money. So do your homework and pay attention to your results.

Using this method, you can pick mutual funds that are as good if not better than the funds used by the professional managers at the large brokers. You’re assured that the investment is being made exclusively for your benefit without commissions, kickbacks or other drains on your returns. If you aren’t going to do the little bit of work necessary to protect yourself, then use a broker. However; you can add a lot to your retirement with a little effort.

Think for yourself (It’s an essential part of living)

Life is a participation sport and we have full control over how much or little we choose to engage in the festivities. I have chosen to actively drink in the world around me through exploration, reading and participating in new uncomfortable activities. As a retiree the free time has offered me more opportunity than ever to explore the world around me. Unfortunately, I see far too many people blindly following and not thinking for themselves.

The more engaged I am in the world, the more I think. Ideas are the engines of change and growth in the human society when they are shared and acted on. Ideas that are not shared or acted on are lost opportunities. Clearly not all ideas are good and some are downright bad. But the older we get, the more experiences we have and the more potential there is for clarity in thinking that is filtered by the mistakes of the past. There also tends to be a trend towards fixating on a position and being unwilling to accept any alternative as credible.

With the growth of easy global communications, we have all become exposed to a broad array of religious, social and cultural ideas. Many of these ideas conflict with basic beliefs that are instilled in us from early childhood. That doesn’t make them wrong, just different. I was raised a Protestant but my wife is a Catholic. For the life of me, I can’t understand why wars were waged over the difference between those two sects of Christianity.

If we choose to think about our beliefs and consider alternatives as another’s personal prerogative, we may reach a point where the world is less polarized. Are Jesus, Muhammad and Hashem all deities that represent the same essential ten commandments? I believe that they are and can’t understand why some of us can’t accept that the foundation of the Muslim, Christian and Jewish faiths are very similar. In fact, you can add in the eastern religions and come to the same conclusion, yet we feel compelled to fight wars over whose god is better. If you think about it, the basic beliefs are the same and we are destroying large swaths of the globe in the name of nuance.

Thoughts are very individual and a higher level of thinking is one of the traits that we as humans possess. Exercising our thinking skill should be a regularly scheduled activity, just like eating and sleeping. We owe it to ourselves to acknowledge that our thoughts are different from everyone else’s and that’s ok. I hold no animus towards those whose favorite color is pink or like brussel sprouts. In the United States of America, we have the right to not only think differently, but to talk about those differences. As Americans, we have the obligation to accept that others have a right to think differently.

Please think daily and draw from within yourself. Don’t be afraid to step away from the crowd and have your own unique thoughts, we all do. Admit it when you are wrong, we all are, it goes with thinking for yourself. If we’re honest with ourselves, knowing we are wrong is a learning experience and part of the thinking process.