| Finding the best mutual funds is not rocket | | | | Why was Jack making money, when he was |
| science, but you won't find the best funds looking | | | | losing it, is what Mike wanted to know. The truth |
| in the wrong places. Simply put, the best stock | | | | is simple. A fund with high investment costs and |
| funds and best bond funds have one thing in | | | | expenses can drain your profits. It's like giving |
| common. What it is might surprise you. | | | | back all or most of your dividend income in many |
| Searching for the best mutual funds based on | | | | stock funds and as much as half in some bond |
| past performance records will get you nowhere. | | | | funds. Over the long term this money could have |
| Last year's best stock funds often turn in a poor | | | | remained in your account to enhance the value of |
| performance when market conditions change. And | | | | your investment. Plus, Mike might have been in |
| the best bond funds from the past can get nailed | | | | one of the best bond funds his guy had to offer, |
| when the interest rate environment changes. In | | | | but the question is... best for whom? Mike or this |
| other words, even the largest and best mutual | | | | investment salesman? |
| funds do not outperform the competition on a | | | | There's one more concern I pointed out to Mike. |
| consistent basis. | | | | Long-term bond funds pay more interest, but |
| But a few fund companies do offer investors a | | | | that comes with a risk as well. When interest |
| consistent profit advantage year after year, and | | | | rates go up, they fall significantly in value. Now |
| that's why I call theirs the best mutual funds in | | | | let's look at Jack's situation. |
| the business. I'll explain with a story about Jack | | | | Jack can not tolerate risk and is a very thrifty |
| and Mike. They were at a neighborhood gathering | | | | fellow. Giving him free advice is a challenge. Not |
| with beverage in hand talking about their | | | | only did I recommend the best mutual funds I |
| investments. Neither understood the subject and | | | | knew of to him, I recommended the cheapest to |
| both were upset that interest rates were so low. | | | | buy, hold and sell. Plus, we decided on short-term |
| Mike was not a happy camper. "I gave my | | | | bond funds because they are subject to much |
| investment guy $20,000 to invest so I could | | | | less investment risk (interest rate risk) when |
| make more interest, and when I got may last | | | | rates in the economy go up. His total cost of |
| statement it was worth $18,000 and I never saw | | | | investing: zero sales charges to buy or sell, and |
| a penny of it', he said. Jack agreed that this | | | | less than ½% a year in expenses. |
| sounded like a raw deal, and asked him what sort | | | | How do you find the best funds that keep the |
| of investment he made. Mike mumbled that he | | | | cost of investing low? Check out the following on |
| thought his guy said something about putting him | | | | the internet: Vanguard, Fidelity, T Rowe Price, and |
| in one of the best bond funds he knew of. Jack | | | | American Century. To keep costs even lower, go |
| smiled because he too had invested in bond funds | | | | with index funds. These are simply passively |
| and was making money according to his last | | | | managed to track stock or bond indexes that are |
| statement. | | | | used as benchmarks for actively managed funds |
| Jack suggested that Mike talk to his brother who | | | | investing in the same investment sector. Why pay |
| was retired from the investment business, and | | | | more for management that tries to beat the |
| here's what I saw when I looked at Mike's | | | | benchmark when very few can with any kind of |
| statement. Mike was in a long-term bond fund | | | | consistency? |
| that paid a decent dividend yield, with the | | | | What's even worse is that many of the funds |
| dividends reinvested to buy more shares. The | | | | with a high cost of investing under perform their |
| problem was two-fold. First, he paid sales charges | | | | benchmark - the index their performance is |
| of 4% that came off the top, and yearly | | | | compared to. Now you know why. It's tough to |
| expenses equal to more than 1% were being | | | | keep up with the averages when your portfolio |
| drained from his account - plus his guy was | | | | has big leaks in it called high expenses and other |
| charging him for his services. Second, interest | | | | fees. The best funds for your money: no-load |
| rates had gone up a bit, which caused the value | | | | index funds from a major company like those |
| of his shares to fall a bit. | | | | listed above. |