Analyzing mutual fund performance

September 25, 2006 12:16 PM

How do I best analyze the performance of my mutual funds?

I've got 3 sets of mutual funds, all for the purpose of retirement investing.

The first is a defined contribution plan that only my employer can deposit into. It is a well-run state retirement system. I get to choose how the funds are invested. I am in 5 funds, and in the next year (2007) contributions will be ~$420 per quarter ($5k/yr). I like this because, hey, free money.

Next is a deferred compensation plan (457[b]) which only I contribute to - there is no matching. Same sort of deal as above, only with a different mix of 5 funds. I contribute ~$215/paycheck biweekly (~$5600/yr). I like this because it is easy -- I don't really notice the deduction and also it's pre-tax.

Last is a Roth IRA which I hope to max out each year. For 2007 that means $4k. I don't contribute on a set schedule, just sort of whenever I have the $$ and the time is right. I am invested in 2 funds here. I like this because yay, no taxes later (sorta).

With all this lead-in: Given that I don't plan to ditch any of these anytime soon (& I hope to keep investing at this level or higher for the forseeable future), how do I make sense of all this? Do the standard financial ratios apply? Is there a customary way for the individual investor to chart this stuff? What do you do that works for you?

posted by contessa to work & money (13 comments total)

(woops. I meant $420/month on the first one).
posted by contessa at 12:19 PM on September 25, 2006

I'd like to make a side bet on the over/under for the number of times people will answer that an Index fund outperforms all managed funds. I'm going to go with 10. The reason this is the stock answer..because it's true and it's cheap. You've got a total of 12 funds, right? That's not too many to manage, but to make it simpler why not reduce it by going with:

1 hands off, 30 year retirement fund (can't remember what these are called, but you tell them when you want to retire and they manage with a reducing amount of risk till you retire)

and

1 or 2 Index funds that track the whole market or the SP500.

That oughta be good. You can then rotate in three or four other funds just to play and try to beat the market without too much risk.
posted by spicynuts at 12:28 PM on September 25, 2006

I found http://www.myfinancialadvice.com via an article in the wall street journal the other day and I must say the service I got there was well worth the money I spent on it.
posted by krautland at 12:56 PM on September 25, 2006

spicynuts -- thanks. The number of funds isn't worrisome to me and the mix I have is doing well - with the exception of the wet brown mess that was last quarter. I know about index funds - I'm in 2 - and 50% of my IRA is in a 30-yr retirement fund. As for the rest, I'm investing it moderately agressively for the time being - hoping to make up some of the difference since I didn't invest anything in my 20's (I couldn't, I didn't have any money!). That isn't my long-term strategy, however.

Although any & all hot stock tips are appreciated, what I really need is how to track it all and gauge how well (or poorly) funds are doing over time, given what has been invested into them.
posted by contessa at 1:06 PM on September 25, 2006

Compare the funds to the performance of the S&P 500, the standard benchmark.
posted by cahlers at 1:08 PM on September 25, 2006

I think, Contessa, that you are in a very strong and solid boat, based on what you've just said. The absolute best approach, barring spending shit loads on a personal financial advisor, is to do what you've done and then FORGET ABOUT IT.

There are books and books of evidence that this is the best strategy.

For tracking, you should just simply look at your prospectuses each quarter and see how your funds do against their benchmarks. You can then look at Morningstar and see how other funds of the same type do against their benchmarks. You can also consult Morningstar every 6 months to see if the ratings on your funds have changed.

But seriously, hands off is the best approach.
posted by spicynuts at 1:15 PM on September 25, 2006

So, ot knowing all the details of the American system, you can, of course, calculate basic return over a period of time. On top of that, you woul dusually calculate a before and after tax return, as there are retirements investments and I assume there's some tax incentive somewhere.

Finally, if tax-deferred investments will have tax implications on withdrawal (like a Canadian RRSP) you may want to do some projections for future cash flow, with an fixed future cash flow from each source and then see how much tax you'll be paying & how much money you'll need in each type of account.

At this point, it's customary to suggest obtaining paid professional advice. Retirement planning is deadly complex due to a myriad of tax regulations and potential ways to optimize things.
posted by GuyZero at 1:18 PM on September 25, 2006

The longer away from retirement you are, the more aggressive your portfolio should be. Choose growth funds with a sprinkling of international growth funds.
posted by eas98 at 1:19 PM on September 25, 2006

Folks, contessa isn't looking for investment advice, she's looking for how to track what she has.

There are two ways to do what you ask in your follow-up comment:

1) The simple way is simply to establish an account with some service that allows you to track the performance of mutual funds. for example, you can set up a free account on Yahoo Finance, input the funds that you are in and how much you have invested, and track their performance through their chart function (here, for example, is a comparison between Vanguard's Total Stock Market and SP500 indices over the past 5 years). this gives you a quick and easy way to see how the funds you are invested in are performing. You could also look at a site such as Morningstar, which has loads of information on mutual funds, including comparison of funds with their closest competitors.

2) The above method tells you how a fund has performed in general, but does not give you a precise indication of exactly how well it is performing for you. To do this, you need to calculate the "cost basis" of your investment - that is, you need to determine exactly how much you have paid in, so that you can compare this to the amount that you have earned. this is complicated for mutual funds, because: (a) they pay dividends that are usually reinvested; (b) they often charge fees, which are substracted from the value of the fund; (c) you are contributing over time, and thus buying shares at different prices each month.

I wish I could direct you to a free site that will do this for you, but unfortunately I don't know of any. Some investment firms will do this for you - you may want to check to see if yours calculates "cost basis" or "personal rate of return" or something similar. Some proprietary software (Quicken, etc.) will do it for you, but you have to be diligent about entering all of your information regularly.

FWIW, I think that method #1 will prbably be good enough for you (its what I do). The main thing to watch out for is what sort of fees you are being charged for the funds that you are in. Compare whatever you are in to similar Vanguard stocks, as they have some of the lowest fees around.
posted by googly at 1:28 PM on September 25, 2006 [1 favorite]

Also: If you sign up for a free account with the aforementioned Morningstar, you can use their "portfolio" function to track all your funds. this might well be all you need.
posted by googly at 1:32 PM on September 25, 2006

Thanks all -- googly's #2 tip on calculating cost basis is pretty much what I was after. I know I'll never get a totally accurate picture but close is close enough.

And as for spicynuts' tip to be hands-off -- I completely agree. For the most part I have been pretty hands-off but some big changes lately, both in job and income, compel me to take a hard look at this and evaluate where I am. I will commence not-thinking-about-it-anymore as soon as I've got it all figured out :)

Thanks again!
posted by contessa at 4:05 PM on September 25, 2006

Although it's not difficult to judge the performance of a mutual fund, it is difficult to judge YOUR performance since you are continually making new investments.

To judge your performance, you can set up an excel spreadsheet, entering the date of each transaction, the amount of each transaction (as a negative number), and the ending balance as a positive number. You can then use the XIRR function in Excel to calculate your time-weighted return. Remember to account for the beginning balance, if there is one.

Finally, make sure your mutual fund expenses are low. The higher your expenses, the harder it is for your mutual fund to earn a respectable return.

Good luck,

JLP
AllFinancialMatters
posted by JLP at 9:12 PM on September 26, 2006

Contessa,
I commend you for being so proactive and eager to invest. As I see it, you're headed in the right direction. But are you getting to where you want to be fast enough? In other words, are you invested in the right mutual funds and exploiting all the possibilities to the fullest that you're employers are offering? It sure seems like it. If I understand you correctly, you want to know your return on investment for mutual funds you've bought multiple lots for.

Above all else, "cost basis" is a term you need to become familiar with. It will take some work to crunch all the numbers, but it will worth your time to figure out the number of shares and price paid for each lot of mutual funds you own. If you're been investing in these funds for awhile, you'll have to get a hold of all your old statements and spend some time putting them in Excel.

Buying personal finance software (such as Quicken or Money) can also be boon to keep track of your finances. The caveats with these are that: 1) they don't interface with all banks and investment companies, forcing you to manually enter the data like you would do in Excel anyway, 2) if they do interface with these programs, historical data typically goes back no more than three months. Surely you've been investing in these funds for longer than that. Transactions older than that (say, past three months) will have to be entered manually.

In sum, caculate cost basis with Excel.

Paulino
posted by paulino636 at 10:42 PM on October 2, 2006