| About this time every year, the personal | | | | selecting a mutual fund is the expense ratio. |
| finance magazines will perform an annual | | | | Fortunately, the Internet and Money's |
| ritual: Looking at how mutual funds have | | | | hyperlinks let you rather easily get to |
| performed over the past year-and then using | | | | mutual fund prospectuses, and these materials |
| that information to suggest which mutual | | | | provide expense ratio information. This is |
| funds you should pick for the coming year. | | | | where you want to start-and probably |
| Sadly, this work is a complete waste of time. | | | | finish-your mutual fund investing. You almost |
| | | | can't win if you choose a mutual fund with a |
| It's the class, stupid | | | | very high expense ratio. You almost can't |
| | | | lose if you choose a mutual fund with a very |
| Choosing a mutual fund, all the research data | | | | low expense ratio. |
| show, is actually very straightforward and | | | | |
| simple. Most of your performance depends on | | | | Why not try to beat the market? |
| the asset class you select. In other words, | | | | |
| the biggest, most important, and most | | | | Let me also briefly address the issue of |
| significant decision you make is whether you | | | | finding a mutual fund manager who generates |
| want to put money into stocks, bonds, money | | | | above average returns. Clearly, some mutual |
| market accounts, real estate, or some other | | | | fund managers, over time, have produced |
| class, such as international stocks. | | | | extraordinary returns-returns so high that |
| | | | they more than offset even large expense |
| Cost is the second factor to consider | | | | ratios. The point you need to realize, |
| | | | however, is that if you do choose to look for |
| Within a given class of investments, such as | | | | a star mutual fund performer, what you need |
| stocks, the research shows that the most | | | | to do right now is identify somebody who is |
| significant characteristic that determines | | | | going to be a star over the next two or three |
| the goodness of the investment is the expense | | | | decades, not someone who has been a star over |
| ratio charged by the mutual fund management | | | | the past two or three decades. Long-term |
| company. For example, if one mutual fund | | | | investing means you are looking out several |
| company charges you 2 percent of your fund | | | | decades into the future-even if you are |
| balance to manage your investments and | | | | retired. |
| another company charges you .2 of a percent, | | | | |
| almost invariably, the mutual fund charging | | | | Note, too, that who performed well last year |
| the lower expense ratio will do better over | | | | is no indication of who is going to perform |
| long periods of time. | | | | this year. Repeatedly, studies have shown |
| | | | that last year's or last quarter's hot |
| Asset allocation for lazy people | | | | performer is not this year's or this |
| | | | quarter's hot performer. |
| When you understand the importance of asset | | | | |
| allocation and investment costs, picking a | | | | Putting my money where my mouth is |
| mutual fund boils down to two simple issues. | | | | |
| The first issue is how you want to apportion | | | | Here's my personal investment strategy. I am |
| your money between stocks, bonds, and other | | | | a firm believer in index funds. Through the |
| investments. Typically, you want to have the | | | | late 1990s, I invested almost my entire |
| majority of your long-term investment money | | | | portfolio (perhaps 95 percent or more) in the |
| in stocks, some portion in bonds to reduce | | | | widest available stock index fund available |
| the volatility of your investment portfolio, | | | | to me. In the late 1990s, after the stock |
| and some portion of your money-perhaps your | | | | market became obviously over-valued (I said |
| rainy day fund-in something like a money | | | | this in print in books like the Millionaire |
| market account. | | | | Kit (Random House, 1999), I began using |
| | | | balanced index funds (which index both stocks |
| The second issue you need to focus on in | | | | and bonds). |