| With over 6,000 mutual funds available, it may be | | | | fits of lousy ones. Compare the fund's returns to |
| tempting to pick funds from a popular star or | | | | a relevant benchmark index, (large-cap vs. |
| index rating system. Savvy investors, however, | | | | S&P 500, small-cap to the Russell Index, etc.) |
| balance multiple factors in their selection process. | | | | Solid funds should not only consistently beat the |
| Ratings represent only the historical performance | | | | benchmarks, they should also beat their peers. |
| of funds and cannot predict the future. | | | | Seek good managers |
| Performance consistency, management skill, and | | | | Always review the experience and performance |
| expense limitations are among the many factors | | | | of the fund's managers. When you buy a mutual |
| that influence a fund's prospects. Each must be | | | | fund, you are actually investing in the experience, |
| carefully evaluated to improve your chances of | | | | skill, and savvy that the manager brings to the |
| finding a fund to outperform the market. | | | | table. When the manager leaves, the fund |
| Create a plan | | | | performance generally goes with him. How many |
| Define your financial goals. Are you saving for | | | | years has the manager been leading the fund? |
| retirement? Putting money aside for a home? | | | | The longer (if generating strong results), the |
| Funding a child's college education? Your answer | | | | better. And keep an eye out for the gurus. The |
| will have significant implications on your choice of | | | | industry's better managers are well-respected, |
| mutual funds. More time gives you flexibility to | | | | high-regarded, and often quoted in the press. You'll |
| use an aggressive approach. Immediate needs call | | | | find multiple articles and even manager profiles |
| for safety and capital preservation. Take careful | | | | published in the popular financial magazines and |
| consideration of your tolerance for risk. If the | | | | newspapers. |
| market dips, at what point would you lose sleep? | | | | Think cheap |
| Is it a 5% drop? 10% drop? An asset allocation | | | | Check out the fund's cost of ownership. While you |
| plan will balance your portfolio and maximize | | | | can not predict a fund's performance, you can |
| return for your level of acceptable risk. | | | | control the ongoing expenses. Since expenses |
| Dismiss recent results | | | | impact your ability to grow investments over |
| Past performance is no indicator of future results. | | | | time, select a fund with low costs. Check the |
| No truer words could ever be spoken and they | | | | expense ratio, sales fees, trading costs, and 12b-1 |
| are included in every mutual fund advertisement. | | | | fees charged to cover the marketing, distribution |
| But it's extremely difficult to ignore these | | | | and sales. Everything counts against your bottom |
| numbers which the fund companies conveniently | | | | line - keep it small as possible. When possible, |
| place in big bold letters - immediately above the | | | | choose funds with expenses less than their |
| fine print warning us. Nothing is more attractive | | | | category average. |
| than a fund with a great record, especially given | | | | Taxes are often overlooked and can substantially |
| the dismal performance in the market. | | | | reduce your after-tax gain unless investing within |
| Past performance can provide a good starting | | | | a tax-deferred, retirement account. Avoid funds |
| point, but nothing more. In fact, past performance | | | | with large distributions (capital gain payments) by |
| predicts losers better than the winners. A 1998 | | | | searching for funds with low turnover. Since |
| study from fund-tracking firm Morningstar, | | | | buying and selling stock incurs transaction costs, |
| demonstrated the top fund performers rarely | | | | lower turnover translates to lower expenses and |
| hold their spot on the charts. The study also | | | | lower capital gains' taxes. Fund managers who |
| concludes bottom performers rarely did anything | | | | seek to boost returns through repeatedly buying |
| but continue to sink. Never assume the past will | | | | and selling securities are no friend of yours. |
| repeat itself, yet, ignore a fund's historical record | | | | Putting it all together |
| at your own peril. Avoid the perennial losers. | | | | Picking mutual funds is a challenging task. You will |
| Seek consistency | | | | need to spend time learning, researching, |
| Evaluate a mutual fund's performance beyond just | | | | investigating, analyzing, and comparing. The key is |
| the recent year. Any fund can get lucky, but it's | | | | to develop your own methodology using some of |
| the rare firm that prove themselves year after | | | | the components listed here along with your own |
| year. Examining a fund's long term performance | | | | judgment and decision capabilities. Review your |
| can answer the question of consistency. If the | | | | investment plan and fund selection criteria at least |
| performance was good, was it repeatable due to | | | | once a year. Make sure the plan still matches your |
| skill - or merely a spike due to dumb luck? | | | | goals and the funds match your expectations. |
| Watch for a solid record of returns, rather than | | | | It's your money. It's your future. Take your time. |
| funds showing spurts of great years followed by | | | | Get it right. |