| What exactly defines the "best mutual funds" | | | | list. The best mutual funds to own tend to be |
| anyway? Funds are by far the most widely used | | | | index type funds. The truth is, most actively |
| investment vehicle in the world. There are now | | | | managed mutual funds UNDER-perform the major |
| more mutual funds than there are stocks in the | | | | market indexes over time. There are a lot of |
| US market. With over 26 thousand funds that | | | | reasons for this, and we've already mentioned |
| Morningstar keeps track of, how can someone | | | | most of them. Commissions, expense ratios, and |
| know where to find the best ones? | | | | taxes all add to the cost of owned actively |
| You've come to the right place to find out! | | | | managed funds. All these costs make it much |
| You'll have to read all the way to the end of this | | | | harder for the manager to keep up with, not to |
| page to see my recommended list of "Best | | | | mention out-perform the market index. Here are |
| Mutual Funds for 2009". But before we dive into | | | | a few quotes from some famous investors about |
| that, let's back up and do a little mutual fund 101. | | | | investing in index funds... |
| What is a mutual fund? A mutual fund is the most | | | | "...the best way to own common stocks is |
| popular form of a pooled investment known | | | | through index funds... - Warren Buffett, Berkshire |
| today. They are designed for people who want to | | | | Hathaway Inc. 1996 Shareholder Letter |
| have their money professionally managed at a | | | | "A very low-cost index is going to beat a |
| fairly reasonable cost. In addition to professional | | | | majority of the amateur-managed money or |
| management, they give an investor convenience, | | | | professionally-managed money," - Warren Buffett |
| diversification, record keeping, tax reporting, and | | | | 2007 |
| safekeeping of securities. | | | | "Additionally, those index funds that are very |
| How do mutual funds make money? Mutual funds | | | | low-cost (such as Vanguard's) are investor-friendly |
| make money in several ways. The main way is | | | | by definition and are the best selection for most |
| from internal fees that are called expense ratios. | | | | of those who wish to own equities." - see page |
| Expense ratio sounds a lot better than FEES, | | | | 10 of Berkshire Hathaway Inc. 2003 Annual |
| right? But it's the same thing. It's a percentage of | | | | Report |
| the funds assets that are taken out every day, | | | | "Over the 35 years, American business has |
| and it's how the mutual fund company stays in | | | | delivered terrific results. It should therefore have |
| business. You never see these fees come out, | | | | been easy for investors to earn juicy returns: All |
| but they definitely affect your annual returns. You | | | | they had to do was piggyback Corporate |
| want to try to make sure your expense ratios | | | | America in a diversified, low-expense way. An |
| are around 1% or less per year. Some specialty | | | | index fund that they never touched would have |
| funds are going to be higher, but for the most | | | | done the job. Instead many investors have had |
| part you should try to buy funds that are under | | | | experiences ranging from mediocre to disastrous." |
| 1%. Funds are required by law to produce a | | | | - page 5, 2004 Berkshire Hathaway Annual |
| document called a prospectus, which no one ever | | | | Report |
| reads, that tells you important information about | | | | "Most individual investors would be better off in an |
| the fund. Fortunately, Morningstar reports most of | | | | index mutual fund." - Peter Lynch |
| this same information in a much easier to | | | | Finally, I'm done with all of that! Now here's my list |
| understand way. The best mutual funds will keep | | | | of recommended funds for your own portfolio for |
| these internal costs to a minimum. | | | | 2009. |
| What about commissions? This is an important | | | | The Best Mutual Funds For 2009 |
| one. Many mutual funds sold today by bank | | | | The following are all no-load funds. (Of course!) |
| brokers and full-cost brokers like Merrill Lynch and | | | | Dimensional Small Cap Value (DFSVX) This is a |
| Edward Jones have commissions, or loads. Loaded | | | | small cap value fund that I believe is poised to |
| funds commissions can vary, but most are | | | | perform extremely well as the market and |
| between 1% and 5.75%. That means for every | | | | economy begin to recover from this recession. |
| $1000 you invest, $45 to $57.50 could be coming | | | | Small cap stocks tend to be the first to recover |
| out for a commission to the broker, and the rest | | | | after a recenssion ends, and this fund should be a |
| gets invested into your account. That's not such a | | | | top performer. Dimensional funds are index funds, |
| bad thing if the broker getting paid is actually | | | | but they are enhanced index funds. Dimensional |
| helping you manage your account of mutual funds. | | | | Fund Advisors takes a market index and then |
| Loaded funds can have either front-end or | | | | screens out the stocks they feel are less likely to |
| back-end commissions. Front-end means you pay | | | | perform as well. They use 26 different screening |
| it when you go into the fund with new money, | | | | methods to narrow down the list of stocks they |
| these are called A share funds. Back-end means | | | | want to buy. Then they use some timing and |
| you pay it when you eventually sell the shares, | | | | trading strategies to determine when to buy the |
| these are called B share funds. With a B share, | | | | stock. |
| the back-end commission gradually declines the | | | | Dimensional Emerging Markets Value (DFEVX) This |
| longer you hold it. It's usually completely gone | | | | is an index fund that invests in emerging foreign |
| after 7 years. The problem is, B share funds have | | | | countries. Emerging markets, or under-developed |
| much higher internal expense ratios, sometimes | | | | countries, also tend to lead in performance coming |
| 2.5% per year. This is how they make up for the | | | | out of a recession. This fund invests in countries |
| commission that they paid the broker when you | | | | like Brazil, Chile, China, South Africa, Czech |
| bought it. If you're going to buy a loaded fund, | | | | Republic, Hungary, Mexico, Poland, Israel, Malaysia, |
| you should NOT buy a B share. The other option | | | | South Korea, Indonesia, Philippines, Thailand & |
| is a C share. C share funds have no commission | | | | Turkey. It does not invest currently in Argentina. |
| when you buy it, and a 1% back-end commission | | | | Dimensional Tax Managed US Marketwide |
| if you sell within the first year. The best mutual | | | | (DTMMX) This is another index fund that invests |
| funds will have little or no commission on them. | | | | in large, mid and small cap companies here in the |
| What are 12b-1 Fees? These are another kind of | | | | United States. Morningstar has is rated as a mid |
| internal fee that you'll never see come out, but | | | | cap, but it really invests in all of them. Due to it's |
| you need to be aware of. Most loaded funds have | | | | heavy mid and small cap holdings, I believe it is |
| 12b-1 fees, and a few no-load funds do too. | | | | also poised to do well coming out of this |
| These are basically an annual trailing commission | | | | recession.iShares FTSE/Xinhua China 25 Index |
| that goes to the broker who sold you the fund. | | | | (FXI) This is actually an ETF (which is basically a |
| It's supposed to be his or her incentive to | | | | mutual fund). Basically this is an index fund that |
| continue to take care of your account. It's | | | | buys the 25 largest and most liquid Chinese |
| generally .25% per year, so it's not going to break | | | | companies. The Chinese market lost a huge |
| you. But when you add that on to an up front | | | | amount of it's value in 2008 and has some great |
| commission of 5.75%, and an expense ratio of | | | | potential for 2009. This fund trades on the NY |
| 1.50% or 2.5%, and it starts to become very | | | | stock exchange, and trades just like a stock. This |
| difficult to keep up with the market. If you're | | | | fund lost almost 68% of it's value during the last |
| looking for the best mutual funds, try to avoid | | | | 12 months, so there can be some heavy volatility |
| 12b-1 fees. | | | | here. Don't bet the farm on it, but this would be a |
| What are No-Load funds? No load funds are funds | | | | nice portion of your international exposure. Save |
| that have no commission for the investor to pay | | | | yourself the effort of doing research on Chinese |
| at all. So every $1 that you invest goes right into | | | | companies and just buy some of this.iShares U.S. |
| the fund. Some famous no-load mutual fund | | | | Financial Sector (IYF) This is another ETF index |
| companies are Fidelity Investments, Vanguard, | | | | fund that tracks the Dow Jones U.S. Financials |
| and the Dimensional Funds. The only way a | | | | Index. This fund lost over 75% of it's value during |
| no-load mutual fund makes money is from the | | | | the last 12 months, and is now having a nice |
| internal expense ratios. But that doesn't mean | | | | rebound as you can imagine. I think there is most |
| that their expense ratios are higher. In fact, quite | | | | likely some great potential for returns in the |
| the opposite can be true. No-load funds are in our | | | | financial sector, and a low cost index fund like this |
| opinion are some of the best mutual funds | | | | is an excellent way to get some exposure. |
| available today. | | | | Energy Select Sector SPDR (XLE) Yes, it's |
| What is an ACTIVELY managed fund This is a | | | | another ETF index fund that invests in companies |
| fund where the fund manager is actively buying | | | | from oil, gas, energy equipment & energy |
| and selling securities inside the fund in attempt to | | | | services. This is a great, low-cost way to get |
| outperform the market. Many people think that | | | | exposure to the entire energy sector, including |
| actively managed funds are the best mutual | | | | the servicing companies. These stocks all tend to |
| funds. Keep in mind that each time a trade is | | | | move up and down with the price of oil. Last year |
| placed, the fund has to pay a commission. These | | | | oil got over $147/barrel in May, and by October it |
| commissions are in addition to the funds expense | | | | was below $38/barrell. We could easily see oil |
| ratio and are only reported in the annual report. | | | | prices right back up above $100 in no time at all. |
| Morningstar says that these trading commissions | | | | Dimensional International Value (DFIVX) |
| can run as high as 1% - 2% of the funds assets | | | | This is another DFA index fund that invests in |
| per year if the manager is a very active trader. | | | | developed foreign countries. This would include the |
| You can get a feel for how much trading is going | | | | following: Australia, Austria, Belgium, Canada, |
| on by looking at the funds turnover rate, which is | | | | Denmark, Finland, France, Germany, Greece, Hong |
| also reported by Morningstar. If a fund has a | | | | Kong, Ireland, Italy, Japan, the Netherlands, New |
| turnover ratio of 50%, that means the manager | | | | Zealand, Norway, Portugal, Singapore, Spain, |
| is selling and then buying again 50% of the funds | | | | Sweden, Switzerland, and the United Kingdom. |
| assets each year. Many stock funds commonly | | | | This would be an excellent choice for the bulk of |
| have turnover ratios of over 100% per year. | | | | your international exposure. |
| Also, when a stock inside a fund is sold by the | | | | Amana Mutual Income (AMANX) This is a large |
| manager, any capital gains that are realized from | | | | cap value fund that invests in mostly U.S. stocks |
| that sale will be passed on to you as the | | | | for preservation of capital and current income. It |
| shareholder. So even though you didn't do | | | | currently has a 5-star rating from Morningstar. |
| anything, you could be paying taxes on your | | | | Although this is not a small cap fund, you still need |
| investment at the end of the year. Funds will | | | | to have some exposure to large caps at all times |
| estimate the amount of capital gains that they | | | | in your portfolio. The unusual thing about this fund |
| plan to pay out at the end of each year. It's | | | | is that investment decisions are made in |
| important to look at those estimates (usually | | | | accordance with Islamic principals. It diversifies |
| published in November) and see if you should sell | | | | investments across industries and companies, and |
| your shares before they pay it to you. This way | | | | generally follows a value investment style. |
| you can avoid taking that gain and getting taxed | | | | Fidelity Strategic Income (FSICX) This is another |
| on it. Yet, some of the best mutual funds are still | | | | one of my best mutual funds picks for 2009. This |
| actively managed. | | | | is a bond fund that invest in many different types |
| So what's a PASSIVELY managed fund? A | | | | of bonds, so it's called a multi-sector bond fund. It |
| Passively managed fund, usually called an index | | | | invests primarily in debt securities by allocating |
| fund, is a portfolio of stocks or bonds that | | | | assets among four general investment categories: |
| replicate a major market index. The S&P | | | | high yield securities, U.S. Government and |
| 500 or the Lehman Brothers Aggregate Bond | | | | investment-grade securities, emerging market |
| Index are two major indexes that most people | | | | securities, and foreign developed market |
| have heard of. There are a lot of people who | | | | securities. The fund uses a neutral mix of |
| now agree that the best mutual funds are | | | | approximately 40% high yield, 30% U.S. |
| passively managed. Passively managed funds are | | | | Government and investment-grade, 15% |
| very low cost funds to own because there are | | | | emerging markets, and 15% foreign developed |
| not a lot of analysts doing research on what | | | | markets. High yield bonds are another type of |
| stocks to buy and sell. These kinds of funds | | | | investment that tend to out-perform as the |
| generally don't do much trading of the stock or | | | | economy and market begins to recover. |
| bonds they own, so this keeps the trading | | | | So there you have it. Hopefully you now know at |
| commissions and taxes low. Expense ratios of | | | | least a little bit more about mutual funds than you |
| passively managed funds are usually in the 0.08% | | | | did before, and you have a list of excellent funds |
| - 0.5% range, much lower than actively managed | | | | to check out for your own portfolio. Bottom line |
| funds. These are an excellent choice for an | | | | is, keep your internal expenses low, try to |
| investor who is satisfied to match the | | | | eliminate commissions if possible, and buy index |
| performance of the index. | | | | funds as much as possible. Do these things, and |
| So which mutual funds ARE the best mutual | | | | you'll be ahead of about 95% of your peers. |
| funds? OK, so you're just about ready to see my | | | | |