Choices, Choices (Part 3)

Picking a mutual fund is a loser’s game.

I’m not saying that funds are for losers, or that only losers manage them. A loser’s game is a game that you win by not losing. Call it sports for the rest of us. Not many can drive 300 yards or serve at 130 miles per hour. We do well to keep the ball in play. It’s the same with investments. The way to win is not to lose.

There are some obvious things to look at: fees, turnover, and performance. Fees, because every dollar the manager makes is one less dollar for you to take home. Find out what the fund’s all-in fees are. Disqualify any funds that charge a front-end, back-end, or ongoing marketing charge.

Look at expenses. They shouldn’t be more than 1.5% for the most personal service. For an off-the-shelf fund, it should be less than 0.75%. Turnover measures how long the fund holds its investments. A long-term investor shoots for 20% turnover, or less. Excessive turnover creates a cost headwind. The only thing it assures are steady brokerage fees: fees that you’ll be paying.

Surprisingly, performance isn’t that important. Short-term scores are rightly dismissed, but even awesome 10-year records almost always mean-revert and underperform in the next decade. The best thing to look for is consistency.

By focusing on these factors, you should be able to avoid the worst funds. But there is a better way.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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By |2017-07-17T12:35:18+00:00September 21st, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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