A Guide to Selecting Mutual Funds
Wednesday, January 26, 2011
You’ve just started a new job and you’ve been called into the human resources office. You’re handed paperwork to enroll yourself in the company retirement plan – could be a 401k, a 403b, or one of the other available plans. Now comes the hard part – picking the investments you’ll be contributing to.
These investment choices will affect your rate of return, your ability to retire when you want, basically, your life! Your palms start to sweat as you ask the human resources specialist if it’s possible to turn the air conditioning on. She reminds you that it’s -5 degrees out. Now, if you have a financial advisor, you get to call her or him to do this work for you. But if you’re on your own, here are some things you need to consider:
Personal Goals – First and foremost, you need to establish exactly what it is that you want to accomplish with your retirement investments. Conventional wisdom states that the younger you are, the more risk you’re liable to take, but that may not be true in each individual’s case. Most people should have some combination of 60% to 80% in stocks, with the remainder in bonds, cash or guaranteed returns.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTPerformance –You’ve determined where you want to invest. Now it’s time to examine the available mutual funds. Most people will automatically invest in the fund with the highest rate of return in the prior year. This is not always the wisest course of action. To illustrate this point, let’s look at a hypothetical example: In 2010, a fund investing in Huggies purchased by “Octomom” or New York Jet Antonio Cromartie would have performed quite well (**Not an actual fund). There’s no guarantee that the same fund will perform similarly well in 2011 and beyond. Look for investments with a solid track record of at least 5 years, though it’s preferable to have choices that have provided consistent returns for 10 years or longer.
Objective – Mutual funds fall under several categories, and your job is to identify funds with experienced managers who stick to their investment strategy. For stock funds, this includes market capitalizations classified as small, mid-cap, or large. Are the available bond funds short or long in duration? If you’re investing internationally, what countries does your fund option invest in? Educating yourself about these details can help you avoid an unnecessary investing mistake.
Fees – The more you can reduce the cost of investing, the better off your yearly rate of return will be. It might be difficult to find out exactly how much you’re paying for a fund, so some investigation is in order. This includes finding out what you’re paying in commissions, management fees, and yearly “12B-1” fees. Hopefully, your employer has provided low-cost options for you. If not, it’s up to you to do the research to minimize the expenses as much as possible.
Dan Forbes is a regular contributor on business financial issues. His office is in Providence, RI. He leads the firm Forbes Financial Planning and can be reached at [email protected]
Related Articles
- Should you still have a 401k Plan?
- Is Your Company Using Automatic 401(k) Enrollment?
- Making the Case for Real Estate