How do you select a mutual fund to invest in? Well, for one thing, a recent article in the Wall Street Journal challenged the notion of relying on “star ratings” to make your picks.
WHAT IS THIS HULLABALU ABOUT THE STAR RATINGS ON MUTUAL FUNDS?
- Morningstar research rates funds from 1-star (low) to 5-star (high) in their respective fund categories.
- Hotels and Restaurants: A star rating system is reasonably predictive for selecting a hotel or restaurant, but may not be the best approach for picking an investment.
- Investors assume that mutual fund star ratings are predictive. In reality, a higher star rating does not necessarily perform better in the future.
WITH MORE THAN 8,000 MUTUAL FUNDS TO CHOOSE FROM, HOW DO YOU PICK A GOOD ONE?
- Risk and Goals: Consider your investment risk tolerance, time horizon, and goals: examples, growth or capital preservation? Two year time horizon or 20 years?
- Star Ratings: are a great way to begin research.
- Fund Manager: reputation of the fund company? Experience of the fund manager?
- Buy-in: does the mutual fund manager invest in the fund?
- Diversification: 20 stocks or 200?
- Whack-a-mole: Do not chase the current hot-performer.
And many more mutual fund screens are available!
WHAT ROLE DO INVESTMENT FEES PLAY IN SELECTING A MUTUAL FUND INVESTMENT?
- You can’t ignore fees!
- High management fees erode your returns over time.
- 1% or .1%? You don’t have to sacrifice quality or performance to select a cost-efficient fund.