What should you, the investor look for in a mutual fund? Well 2008 was a bummer for all of us. I was reading a statistic that said the average loss for all mutual funds was -38%. Now here we are in 2009 and still losing money hand over fist if you are just playing the waiting game in your funds. I personally stopped cost averaging in back in November and am glad I did. I think we are getting close to start putting some money back to work but I would stay on the light side. It is going to be sometime before things turn around in these markets! Ok, lets look at a few key things when selecting a mutual Fund.
You want to own funds that have the lowest possible expense ratio. Over time, you would be surprised to see how big of a difference these seemingly small percentages can cause in your wealth.
Look for an Experienced Management Team. I like to choose managers that have been with the fund a minimum of 5 years, preferably longer. The longer their track record the more you can compare with other fund managers. Make sure that the managers have a substantial portion of their net worth invested right alongside the fund holders.
Make sure the fund has ample diversification of assets. We have all heard the saying “don’t have all your eggs in one basket” and it is true when it comes to Mutual funds also. Many funds will be very closely related when it comes to the companies they pick. You will want to watch their holdings so you don’t have 3 funds that are all investing in the same companies. Make sure you know what benchmark you are targeting. Some popular benchmarks include the Dow Jones Industrial Average, the S&P 500, the Wilshire 5000, the Russell 2000.
There is a bunch of great resources out there about choosing and selecting a mutual funds. Morningstar is one of my favorite resources for comparing funds. Always remember that the key is to remain disciplined, rational, and try to avoid getting emotional by short term price movements in the market. Your goal is to build wealth over the long-term. You simply can’t do that moving in and out of funds, incurring frictional expenses and triggering tax events. These markets are not easy to watch but if you select a winning fund manager you will be fine. I think we will look back 10 years from today at these historical low prices and talk about it for generations to come.
Good Luck.
