How to Sail Through the Sea of Mutual Funds

When you try to choose a mutual fund to invest in, it can be an extremely daunting task.  It’s easy to get lost in the sea of choices between thousands of mutual funds and tens of thousands of share classes.  Many investors often cling to the nearest lifeboat they see, which often times is a decision based on performance.  The problem is that those rafts can quickly deflate as performance is never a good long term determinant.  So how can you ensure that you have a stable boat that will carry you through the towering waves of mutual fund choices?  Well there are a few different aspects of the decision to consider before you hop aboard.

Are you seaworthy yourself?:  It’s important to know yourself and your comfort level in the rough waters that mutual funds can bring.  Can you handle the stress that comes with the shifting performance of many funds?  Mutual funds can at times require a lot of patience and confidence for investors to wait out small dips for the long term positive performance.  You also need to take your morals and values into account when choosing a company or industry to invest with.  Make sure your ethics match those of the mutual fund you invest with.

Understand the variety of vessels:  Portfolio performance is often determined by how the assets are allocated.  You need to understand the different fund styles.  Take a look at the characteristics of the different fund classes, such as small-cap, large-cap, blend funds and so on.  Once you know the specifics of each of these, determine which ones match the investments that you are looking to make.
Be Aware of the Ebbs and Flows:  Performance of the fund is something to consider when you are choosing where to invest, but many investment professionals warn of the cyclical nature that most funds follow.  It’s important that all performance statistics be examined with a critical eye.  Jumping into a fund when it’s at its height leaves you with a long way to fall.

What’s the cost of a ticket?:  Fees are one of the most dividing issues when it comes to funds.  If the fee on one fund is higher than another, that fund must make up the difference in performance, which is oftentimes hard for managers to do.  Index funds often offer lower fees than funds that are actively managed, which aim at making up for the fees with stock choices.  Overall, fees are something to evaluate near the end of the process.  They shouldn’t make or break your decision, but they are something that can drastically affect your performance and should be taken into consideration.

Watch for people jumping overboard: The turnover rate of a mutual fund is one of the best indicators as to how successful the investment will be.  This rate signifies how many of the holdings in a portfolio have changed over that year, in a percentage.  Those rates can be anywhere from less than 10% to over 300%, depending on how aggressive the fund is.  The higher the turnover, the higher the cost from the frequent buying and selling and other movement efforts.  Its best to target funds with a lower turnover, aiming at 40% or lower in order to avoid the issues that constant trading has on longer term performance.

Become familiar with the captain of the ship:  Another aspect of the fund that you don’t want to see turning over is the fund’s manager.  The stability of a fund can be read by the stability in its manager.  In order to keep their role they must show that they are capable of maintaining a consistent style and discipline in the decisions involved with the fund.  It’s nearly impossible to predict the future success of a fund if the manager role has endured frequent changes.  A good rule of thumb is to find a fund whose manager has been in their position for at least five years to ensure that any patterns will continue to be consistent.

Is the ship on course?:  A strong fund will follow its strategy through thick or thin.  The overall course of a fund shouldn’t change based on market changes.  Of course, the ability to adapt to changes is a positive tool in mutual funds, but the overall strategy and plan of a secure, strong fund should always keep its general course.  Be wary of funds that seem to jump on the bandwagons of investment fads that make them stray from their original direction.

The waters of mutual funds can seem endless and dark at the beginning, but by sorting out a few basic issues involved you can find yourself smooth sailing in no time.  Of course, even the best planning can’t guarantee that you won’t run into a storm or two along your journey.  But the stronger and more secure is mutual fund that you choose to ride along will leave you in a better position to weather the storms and sail off into the sunset.

Photo Courtesy of: boatinsurance.org

Read Full Post »

How To Take Advantage of Your 401(k)

So, you’ve been saving for retirement for years, spending your entire career penny pinching and saving every morsel you can, hoping to live out your years in a stress-free, fully-funded lifestyle.  You started young and have been saving ever since.  Most importantly, you have invested in the magical program people call a 401(k) at your company and have gritted your teeth as you watched a bit of every paycheck funnel into it.  Good for you!  You have taken an initiative that many people avoid.  As a reward for your planning and diligence, you will be granted, no, not three wishes, but three tips to using your 401(k) in the most productive way.

Many people go through the effort of investing in their 401(k) plans, but make critical errors in how they invest into it.  There are few ways to make sure that the money you pay in now, will give you the best payout in the future.

Tip 1:  Make significant contributions.  Many people think that their 401(k)’s future is mainly dependent upon the performance of the investments, but these people are mistaken.  If you invest a small percentage of your income in well performing funds, you won’t find the success that investing a higher percentage in lower performing funds will afford you.  Of course, this means a bigger chunk of your valuable paycheck, but if you can cut back and live frugally now, you will have more wiggle room later.  Also, it’s critical that you invest enough to take full advantage of any match programs from your employer.  That match offers you tax-free money on a shiny silver platter.  Investing only a small percentage of your income into your 401(k) leaves this platter sitting on the table, out of your reach.

Tip 2:  Invest for growth.  You are cutting back, buying the generic cereals and stepping away from the gator skin shoes so that you can put all you can into your 401(k).  If you are making those sacrifices, you owe it to yourself to get the most from that money.  This can be done by making smart decisions inside of your funds.  Like with any investment, this means taking on a bit of risk.  This doesn’t mean playing Russian roulette with your funds, but being too conservative can almost negate the extra effort you are making.  One way to do this is to invest more of your 401(k) money in stocks.  If your investments face average market performance, putting a higher percentage of your investment in stocks, over bonds or cash, you will find yourself in a better position in the long run.  Of course, this involves balancing your risk with the reward you are looking for, but if you consider getting a little riskier with your investments, you could find yourself with a lot more money later.

Tip 3: Avoid undoing all your hard work.  Borrowing from your 401(k) can be one of the most costly loans you can find.  By taking your money out of the fund, you will be costing yourself the growth that money would have given you.  Life brings about surprises and emergencies that may force you to borrow from your 401(k), if this happens, make sure you plan for the company to take the loan payments from your check.  If you find yourself wanting money for expenses, such as a new car, look into a personal loan or home equity line of credit for financing.  Competitive rates on these options will leave you in a better long term position.  The second part of this tip is to avoid cashing out your 401(k) when you leave a company.  Much of your hard earned money will be whisked away by penalties, fees, and growth loss.  There are a few different ways to avoid simply cashing out when you switch jobs.  Many companies allow you to roll over your balance into their plans, which means your investments and growth will hardly skip a beat with the changeover.   You can also roll your plan into an IRA, which offers a broad range of investments not offered with many other retirement plans.  The easiest option may be for you to simply leave your money in the current employer’s plan if you have a significant amount already saved.  The bottom line is that borrowing from your 401(k) or cashing out early can wipe away a lot of the money that you have been so painstakingly saving.

 

Photo courtesy of bemanaged.com

If you have been planning for your retirement and investing with your 401(k) you have put yourself on a path to success.   By doing these few simple things you can make your path smoother and that success brighter.  You are already going through the effort to save for your future, keep these tips in mind and your effort will be much more worthwhile.

Read Full Post »