Selecting mutual funds in which to invest is usually a do-it-yourself effort. A tremendous amount of objective information is available to help potential investors evaluate and select funds. To explain the process of selecting funds, let’s follow Jessica Shipp’s decision making. She is in sales and earns $51,000 annually; she lives in Sacramento, California. Figure 15.4 illustrates the process of selecting mutual fund investments, and Table 15.4 contains performance data for a number of large-cap mutual funds from Consumer Reports magazine.
Review Your Investment Philosophy and Investment Goals
Jessica began by reviewing her investment philosophy and financial goals. T. Jessica has a moderate investment philosophy, and she has a written investment plan . The investment goal she is interested in investing in for now is retirement, and her investment time horizon is the next 30 years or more. She anticipates an annual return of at least 7 to 8 percent. She does not care about income taxes because these investments will be made within Jessica’s tax-deferred 401(k) retirement plan at work. Jessica does not have any lump sums available in a savings or money market account to use for investing. To help fund her retirement plans, she decided to have $200 a month withheld from her paycheck to invest in a mutual fund with a growth investment objective. Jessica’s employer’s 401(k) plan offers about 20 funds as well as company stock.
Review Your Investment Philosophy and Investment Goals
Jessica began by reviewing her investment philosophy and financial goals. T. Jessica has a moderate investment philosophy, and she has a written investment plan . The investment goal she is interested in investing in for now is retirement, and her investment time horizon is the next 30 years or more. She anticipates an annual return of at least 7 to 8 percent. She does not care about income taxes because these investments will be made within Jessica’s tax-deferred 401(k) retirement plan at work. Jessica does not have any lump sums available in a savings or money market account to use for investing. To help fund her retirement plans, she decided to have $200 a month withheld from her paycheck to invest in a mutual fund with a growth investment objective. Jessica’s employer’s 401(k) plan offers about 20 funds as well as company stock.
Eliminate Funds Inappropriate for Your Investment Goals
Jessica began by reviewing all fund classifications and balancing the risks and returns of various funds as illustrated in Figure 15.5. She wants to eliminate mutual funds inappropriate for her retirement investment goal.
Jessica began by reviewing all fund classifications and balancing the risks and returns of various funds as illustrated in Figure 15.5. She wants to eliminate mutual funds inappropriate for her retirement investment goal.
Jessica recognizes that increasing the potential for higher returns also increases the risk to the investor’s capital. Therefore, she eliminated the following types of funds: aggressive income funds, sector funds, aggressive growth funds, and international equity funds, as well as stock in the company where she works. She also realizes that investing too conservatively invites the risk of failure to achieve her goal of a financially successful retirement. Therefore, Jessica eliminated money market funds, bond funds, and balanced funds.
Load or No-Load Funds?
The sales commissions charged by load funds indisputably reduce total returns. Jessica reasoned that since no-load mutual funds have an initial advantage the investor has more money at work she preferred no-load funds. Because her $200 a month was going into investment for retirement, she also thought that 12b-1 fees would be very costly over the long term. For the same reason, she wanted to avoid high management fees. She did not care about back-end loads and exit fees, as these largely disappear over time. Jessica decided to invest in one or more no-load mutual funds with no or low 12b-1 fees and very low management fees.
Investment Advice Needed?
Because Jessica is going to invest in no-load funds, she figured she did not need the services of a broker or financial adviser. Instead, she plans to use the tremendous resources that are available via the Vanguard website information, education, and professional advice. Jessica’s employer offers investing and retirement planning seminars and workshops provided by Vanguard, T. Rowe Price, and other companies. Significant others are welcome to attend. Employer-sponsored financial advice may cover an employee’s entire financial situation, including debt reduction, college planning, spousal assets, real estate, and other investments. Once Jessica’s retirement assets build up to a substantial amount, perhaps $20,000 or more, she might be wise to seek additional professional investment advice.
Screen and Compare Funds That Meet Your Investment Criteria
When comparing the track records of mutual funds, there are a number of criteria to consider. These may include expenses; net asset value; minimum initial purchase; size of fund; ratings; past performance (perhaps one, three, five, and ten years); best and worst performance in up and down markets (volatility); fund manager tenure; andservices. Jessica is interested in value, growth and blend funds, low management fees, and no or low 12b-1 fees. Jessica started searching for mutual fund investments at Vanguard (https:// flagship.vanguard.com/VGApp/hnw/FundsMFSIntro?FROM=VAN), considered among the best mutual fund selection websites. A fund screener or fund-screening tool permits an individual to screen all of the mutual funds in the market. Other mutual fund screening tools are available at the following websites:
Jessica focused on large-cap funds, including those shown in Table 15.4. She researched funds using the Vanguard fund screener. She obtained online a profile prospectus from Vanguard on each of the funds she liked. A profile prospectus (or fund profile) describes the mutual fund, its investment objectives, and how it tries to achieve its objectives. Written in lay language, it offers a two- to four-page summary presentation of information contained in an SEC-required legal prospectus that answers 11 key investor questions, including risks, fees, and details about the fund’sten-year performance record.
Load or No-Load Funds?
The sales commissions charged by load funds indisputably reduce total returns. Jessica reasoned that since no-load mutual funds have an initial advantage the investor has more money at work she preferred no-load funds. Because her $200 a month was going into investment for retirement, she also thought that 12b-1 fees would be very costly over the long term. For the same reason, she wanted to avoid high management fees. She did not care about back-end loads and exit fees, as these largely disappear over time. Jessica decided to invest in one or more no-load mutual funds with no or low 12b-1 fees and very low management fees.
Investment Advice Needed?
Because Jessica is going to invest in no-load funds, she figured she did not need the services of a broker or financial adviser. Instead, she plans to use the tremendous resources that are available via the Vanguard website information, education, and professional advice. Jessica’s employer offers investing and retirement planning seminars and workshops provided by Vanguard, T. Rowe Price, and other companies. Significant others are welcome to attend. Employer-sponsored financial advice may cover an employee’s entire financial situation, including debt reduction, college planning, spousal assets, real estate, and other investments. Once Jessica’s retirement assets build up to a substantial amount, perhaps $20,000 or more, she might be wise to seek additional professional investment advice.
Screen and Compare Funds That Meet Your Investment Criteria
When comparing the track records of mutual funds, there are a number of criteria to consider. These may include expenses; net asset value; minimum initial purchase; size of fund; ratings; past performance (perhaps one, three, five, and ten years); best and worst performance in up and down markets (volatility); fund manager tenure; andservices. Jessica is interested in value, growth and blend funds, low management fees, and no or low 12b-1 fees. Jessica started searching for mutual fund investments at Vanguard (https:// flagship.vanguard.com/VGApp/hnw/FundsMFSIntro?FROM=VAN), considered among the best mutual fund selection websites. A fund screener or fund-screening tool permits an individual to screen all of the mutual funds in the market. Other mutual fund screening tools are available at the following websites:
Jessica focused on large-cap funds, including those shown in Table 15.4. She researched funds using the Vanguard fund screener. She obtained online a profile prospectus from Vanguard on each of the funds she liked. A profile prospectus (or fund profile) describes the mutual fund, its investment objectives, and how it tries to achieve its objectives. Written in lay language, it offers a two- to four-page summary presentation of information contained in an SEC-required legal prospectus that answers 11 key investor questions, including risks, fees, and details about the fund’sten-year performance record.
After reading fund details, looking at the numbers, and comparing performance, Jessica decided to split her monthly $200 investment between Vanguard Windsor II (VWNFX) and T. Rowe Price Equity Income (PRFDX), partly because of their low fees. (The minimum initial investment fee is waived for investments via her employer’s retirement plan.) Jessica almost decided to invest solely in the Vanguard 500 Index fund, but she thinks the fund managers will beat the average market returns. Jessica might be right, or she might be wrong. The next step is for Jessica to contact the human resources department at her employer and sign the documents to withhold $200 a month from her paycheck and invest $100 into each of the two funds. Jessica also knows that for every dollar invested she gets an immediate 50 percent return because her employer’s policy is to match 401(k) contributions 50 cents on the dollar for the first 6 percent of earnings. Jessica’s 401(k) balance in 12 months, therefore, will show $2400 in contributions and $1200 in employer matching contributions (that’s an immediate 50 percent return on her $2400!), plus whatever gain occurs (hopefully not a loss) in NAV. Jessica’s 401(k) balance next year is likely to be more than $3600.
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