How do you choose between the various mutual funds?
April 25, 2008 7:01 AM Subscribe
I have a new IRA. Limited experience with them. How do you choose between the various mutual funds?
I have an IRA (max contributions) and then some extra in a new Schwab account. I now need to choose where to put the money. I’m somewhat new to all of it, and the number of options is overwhelming to research item by item.
I have an adviser (sorta) that recommended a fund that is set up for target retirement age (so he recommended I just dump it into the fund targeting retirement in 35 years).
How have some of you started out? Do you pick 2-3 and spread it based on risk level (some high, some moderate, some low)? Just pick one fund and stick with it? Spread across other variables?
Anything you avoid (load, no load, all that crap I don’t understand fully)?
I have an IRA (max contributions) and then some extra in a new Schwab account. I now need to choose where to put the money. I’m somewhat new to all of it, and the number of options is overwhelming to research item by item.
I have an adviser (sorta) that recommended a fund that is set up for target retirement age (so he recommended I just dump it into the fund targeting retirement in 35 years).
How have some of you started out? Do you pick 2-3 and spread it based on risk level (some high, some moderate, some low)? Just pick one fund and stick with it? Spread across other variables?
Anything you avoid (load, no load, all that crap I don’t understand fully)?
Target retirement funds are fine. They're usually one part stock index fund, one part bond fund, with the percentage in each changing over time.
posted by smackfu at 7:25 AM on April 25, 2008
posted by smackfu at 7:25 AM on April 25, 2008
Here's the thing: a fund set up to automatically adjust itself based on your age is a fine choice if you don't want to--or don't feel competent to--do that sort of portfolio balancing yourself. (I'm sure there will be some people in here telling you that funds are for suckers, and that you should just manage all your investing yourself, but I think that part of being a well-balanced person is recognizing your own limitations, and being unwilling or unable *at this point* to do enough reading and research to educate yourself is nothing to be ashamed of.)
However, if you do buy a target fund, it should be the ONLY fund you buy. All a target fund does is pick other mutual funds for you to hold, and charges you some fraction (like 0.35% of the holdings) on top of the other fund fees in exchange for just taking care of it for you. (Whether you think it's worth it to pay that money depends on how badly you think you might bork it up yourself, or how much you value being able to just set it and forget it.) Buying 2-3 different target funds, or a target fund plus some other funds, defeats the whole purpose; those funds are charging you money to get the "ideal" balance of different sectors of the economy and bonds, and holding other funds is just moving you away from the balance that you're paying the target fund to achieve.
If you want to do it yourself, you could look at the target fund your advisor is trying to sell you, and figure out what its holdings are (usually, it will consist of other mutual funds). That's a pretty good starting point for putting together a portfolio yourself, if you're so inclined. If you want to educate yourself about good criteria to use in picking funds, I highly highly recommend here and here, which are pretty beginner-level guides to mutual funds, fees, and what sort of dangers to watch out for when selecting a fund.
posted by iminurmefi at 8:23 AM on April 25, 2008
However, if you do buy a target fund, it should be the ONLY fund you buy. All a target fund does is pick other mutual funds for you to hold, and charges you some fraction (like 0.35% of the holdings) on top of the other fund fees in exchange for just taking care of it for you. (Whether you think it's worth it to pay that money depends on how badly you think you might bork it up yourself, or how much you value being able to just set it and forget it.) Buying 2-3 different target funds, or a target fund plus some other funds, defeats the whole purpose; those funds are charging you money to get the "ideal" balance of different sectors of the economy and bonds, and holding other funds is just moving you away from the balance that you're paying the target fund to achieve.
If you want to do it yourself, you could look at the target fund your advisor is trying to sell you, and figure out what its holdings are (usually, it will consist of other mutual funds). That's a pretty good starting point for putting together a portfolio yourself, if you're so inclined. If you want to educate yourself about good criteria to use in picking funds, I highly highly recommend here and here, which are pretty beginner-level guides to mutual funds, fees, and what sort of dangers to watch out for when selecting a fund.
posted by iminurmefi at 8:23 AM on April 25, 2008
I strongly concur with yoyoceramic's recommendation of Unconventional Success. I've recommended it here many times.
But it's long and can be a dry read if you're not a finance nerd. It basically recommends well-formed, low-cost index funds in the following core asset classes: equities (with US, international and emerging markets components), real estate (through something like a REIT index fund) and US Treasuries (both inflation-protected and straight). And the key discipline the books recommends is sticking to targeted allocations to each bucket over time. This results in dollar-cost averaging, which can be a powerful strategy.
Vanguard's target retirement fund looks pretty good on fees but it's a bit underweight international equity, in my opinion. However, it's a pretty fool-proof way to avoid making dumb decisions.
posted by mullacc at 8:32 AM on April 25, 2008
But it's long and can be a dry read if you're not a finance nerd. It basically recommends well-formed, low-cost index funds in the following core asset classes: equities (with US, international and emerging markets components), real estate (through something like a REIT index fund) and US Treasuries (both inflation-protected and straight). And the key discipline the books recommends is sticking to targeted allocations to each bucket over time. This results in dollar-cost averaging, which can be a powerful strategy.
Vanguard's target retirement fund looks pretty good on fees but it's a bit underweight international equity, in my opinion. However, it's a pretty fool-proof way to avoid making dumb decisions.
posted by mullacc at 8:32 AM on April 25, 2008
Interesting analysis of various target retirement funds (Vanguard, T. Rowe Price, Fidelity and others).
posted by needled at 8:59 AM on April 25, 2008
posted by needled at 8:59 AM on April 25, 2008
You have two choices. First, target retirement funds that automatically adjust their allocations based on a target date. But ignore the date and choose the one that has the initial stocks/bonds mix you're comfortable with. In college, my profs taught me that you won't do much better with 100/0 than 80/20 due to the much higher risk of an all-stock portfolio. If you choose this option, put everything into this fund. Don't mix target retirement and normal index funds in a portfolio.
Second, split your portfolio into no more than a few index funds. You want funds that track domestic stocks, foreign stocks, and bonds. REIT funds are nice but many REITs are already included in a lot of domestic stock index funds. Bond funds usually contain some percentage of federal treasuries. This mix will maximize return and minimize risk because some part of the portfolio should always do well.
You can do better with #2, but #1 is still quite good and pretty much foolproof.
posted by pandanom at 9:59 AM on April 25, 2008
Second, split your portfolio into no more than a few index funds. You want funds that track domestic stocks, foreign stocks, and bonds. REIT funds are nice but many REITs are already included in a lot of domestic stock index funds. Bond funds usually contain some percentage of federal treasuries. This mix will maximize return and minimize risk because some part of the portfolio should always do well.
You can do better with #2, but #1 is still quite good and pretty much foolproof.
posted by pandanom at 9:59 AM on April 25, 2008
yoyoceramic's first sentence is all you need to know. If you don't know how to pick a mutual fund, by an S&P index fund. If you try and pick a managed fund without a lot of knowledge you'll very likely do worse than if you just bought the index fund.
You may still be more likely to do worse even if you do have a lot of knowedge.
posted by Justinian at 10:13 AM on April 25, 2008
You may still be more likely to do worse even if you do have a lot of knowedge.
posted by Justinian at 10:13 AM on April 25, 2008
What yoyo said. Look for an index fund you like (S&P500 or otherwise) with the lowest load (i.e, the tax the administrators charge to run the fund - IIRC .5% is pretty cheap, 1.5% is bad).
posted by zippy at 12:52 PM on April 25, 2008
posted by zippy at 12:52 PM on April 25, 2008
1) Order the available stocks by lowest commission
2) Choose the ones that look least actively managed (indexed funds and sector funds)
3) Diversify -- buy a S&P 500 index, an international index, a little REIT, a little bonds -- different asset classes. Allocate according to your comfort level.
4) Contribute regularly for cost averaging and rebalance annually.
Even if you do a target retirement fund, it probably is just US markets. You would do well to invest in an international fund as well.
posted by kindall at 3:00 PM on April 25, 2008
2) Choose the ones that look least actively managed (indexed funds and sector funds)
3) Diversify -- buy a S&P 500 index, an international index, a little REIT, a little bonds -- different asset classes. Allocate according to your comfort level.
4) Contribute regularly for cost averaging and rebalance annually.
Even if you do a target retirement fund, it probably is just US markets. You would do well to invest in an international fund as well.
posted by kindall at 3:00 PM on April 25, 2008
Here's a link to the Investment Company Institute. I think their educational resources would be a great place to start.
You might want to specifically look at the "Frequently Asked Questions About Mutual Fund Fees" - this page will help explain what a no-load fund is, for instance.
It's been my experience that it doesn't take as much effort as you think it will to understand the basics of what you're doing financially. And, the more you learn, the less scary it will seem!
posted by belau at 5:52 PM on April 25, 2008
You might want to specifically look at the "Frequently Asked Questions About Mutual Fund Fees" - this page will help explain what a no-load fund is, for instance.
It's been my experience that it doesn't take as much effort as you think it will to understand the basics of what you're doing financially. And, the more you learn, the less scary it will seem!
posted by belau at 5:52 PM on April 25, 2008
Even if you do a target retirement fund, it probably is just US markets.
Huh? Vanguard and T. Rowe Price target funds (both recommended by either Money or Kiplinger's, can't remember which) include foreign funds, as do Fidelity's.
I'll second the previous posters in that you should buy either an appropriate target fund OR some broad index funds that track the US and foreign markets, and eventually add a bond index fund to the mix. Watch the costs (expense ratios). Load funds (with a sales charge) are generally no better than no-load funds (there are exceptions).
If you'd like to learn about this stuff, I recommended you register for a free membership at Morningstar, which rates mutual funds. They'll repeatedly urge you to pay for a full membership, but I think it's safe to say that you don't need it. They even have free "courses" to teach your about investing.
posted by pmurray63 at 9:44 PM on April 25, 2008
Huh? Vanguard and T. Rowe Price target funds (both recommended by either Money or Kiplinger's, can't remember which) include foreign funds, as do Fidelity's.
I'll second the previous posters in that you should buy either an appropriate target fund OR some broad index funds that track the US and foreign markets, and eventually add a bond index fund to the mix. Watch the costs (expense ratios). Load funds (with a sales charge) are generally no better than no-load funds (there are exceptions).
If you'd like to learn about this stuff, I recommended you register for a free membership at Morningstar, which rates mutual funds. They'll repeatedly urge you to pay for a full membership, but I think it's safe to say that you don't need it. They even have free "courses" to teach your about investing.
posted by pmurray63 at 9:44 PM on April 25, 2008
Looks like my concept of target funds is out of date. Thanks for the correction.
posted by kindall at 5:23 PM on April 26, 2008
posted by kindall at 5:23 PM on April 26, 2008
This thread is closed to new comments.
Instead, Buy index funds. A portfolio consisting of diversified index funds. See this post. Unconventional Success is the best book anyone can read on this matter.
See these articles by Seeking Alpha, which make a strong case for a broadly diversified ETF portfolio.
Why you shouldn't buy mutual funds
The seven advantages of ETFs over mutual funds
/Financial Proselytizing
posted by yoyoceramic at 7:17 AM on April 25, 2008