Investing - How to Choose a Mutual Fund

Investing - How to Choose a Mutual Fund

(2023-09-13 - I suggest that you not use actively managed mutual funds in an ordinary account (i.e. not tax advantaged). Any actively managed fund can suffer from bad management due to management change or bad luck. Extricating your money can result in large capital gains and the resulting taxes. Not extricating your money can be even worse. Choose funds that don't suffer from bad management - index funds, including indexed ETFs.)

I have defined, in previous posts, various measures of mutual fund strategy and performance - yield, turnover, etc. This post is to get you to think about how to use these measures to choose a fund.

Turnover - I want low turnover. This indicates investing in a company rather than trading stocks. In addition, high turnover increases hidden trading costs. I try for less than 25%, i.e. on average each asset is held for four years.

Expense ratio - higher expense ratio does not buy you anything. If Vanguard can run a great fund like Wellington for .25%, it looks to me like anything above this is just profit for the mutual fund company. If you limit yourself to .25%, that will be Vanguard funds and index funds. If you want more choice, Dodge and Cox funds are close to .5%. Funds under 1% are common. Certainly do not accept anything above 1%, or maybe 1.5% for international funds.

Yield - this tells you how much dividend income the held stocks and bonds produce. I prefer companies that distribute dividends because that indicates to me that they are a money making enterprise. A lot of companies make no money and their stock price is based on speculation of future earnings - you can make or lose a lot of money on these.

Total assets - if a fund is too big, it is can be difficult to manage. This depends on the strategy. If a fund trades constantly, big is a disadvantage. If the pool of stocks in the fund's strategy is limited, big is a disadvantage. Large cap, balanced, worldwide, size is not generally a problem.

Past performance - I look at past performance, especially performance in down markets. This shows how well the chosen stocks and the fund strategy handles these situations. I do not care much about short term out-performance - this is likely luck. When looking at past performance, some web pages include reinvested distributions and some do not. Morningstar does. Yahoo does not, they only report share price. Beware.

And beyond measures - I prefer funds that are run by stable companies, with a management replacement strategy. Small mutual fund companies may have very good funds. But they may be bought by other companies looking to feed on their reputation or past performance. And their management replacement system may be sub par.

(2023-09-13 - Note that index funds tend to be low turnover, low expense ratio, insensitive to total assets issues, and insensitive to management issues. A very good start on my above noted preferences.)

I like allocation (balanced) funds. They make life easier by keeping the stock/bond ratio constant (or as the management sees fit). And they have less volatility than pure stock funds. And I like global funds. There is a big economy outside the US and exposure to other currencies sounds good.

Yahoo does a good summary with expense ratio, turnover, yield, total assets. Morningstar has this buried in a sea of information that I don't care much about. Mutual Fund Observer ( www.mutualfundobserver.com ) has a good forum.

Some bond and balanced funds to look at (I no longer follow pure stock funds) -

• US bond - dodix, lsbrx, vcorx
• US balanced - dodbx, mapox, prwcx, vwelx, vwinx
• global bond - lsglx
• global balanced - rpgax, vgwix, vgwlx

Some stable, well run mutual fund companies -

• Vanguard
• Dodge and Cox
• T. Rowe Price

On a related topic - don't take security lightly with your investments.

I once saw a financial knowledge test question - is it better to have all of your money in one brokerage or have it split in two at different brokerages? The answer was - makes no difference, but the second brokerage is a waste of effort, your assets are insured. I think that this is WRONG. If someone uses identity fraud to steal your money, having it at two different places with two different access methods can thwart half of the theft. You might recover the stolen money. But it might take months. If I see my money disappear from one brokerage, I will be on the phone to the other saying "LOCK MY ACCOUNT. NOW".