RETIREMENT INVESTING INSTITUTE          

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Mutual Fund Resources

 

Mutual funds are a major vehicle of choice for millions of investors. They are good ways to get started in investing small or regular amounts. They also have the virtue of being less exciting than individual stocks -- which many people buy high when feeling greedy, only to sell at a loss later when the hype and buzz wear off.  One of the great attractions of funds is that they literally can’t fall to zero as individual stocks can!  For a mutual fund to go to zero, literally every single one of the stocks or bonds it holds would all have to go to zero at the same time. There are  some underperforming portfolio managers out there, but none are that awful

Some of the major attractions of investing through mutual funds are that they are professionally managed, they provide diversification across a large number of individual securities (less so in the case of industry or sector funds), they allow investments of small regular amounts at low or zero cost (be careful to choose NO-LOAD funds!), and they can be sold or “redeemed” in odd dollar amounts to meet financial needs, whereas selling small amounts of individual stocks can entail significant brokerage costs.

R-I-I is of the belief that any adult of reasonable intelligence can learn to be a fairly successful investor. Therefore, we strongly advocate that investors DO this learning and then avoid paying the high costs of buying mutual funds that have “loads” – industry jargon for commissions. Such load funds can readily be found in newspaper and database listings by noting classes of shares such as A,B,C, I, Y, and so on. .No-load funds have no more than two share classes: one for individual investors and possibly another for large institutional investors (which carries a lower annual expense ratio). And it does not matter whether you pay a front-end load (at time of purchase) or an equal-percentage back-end load upon selling: your investment result will suffer the same penalty. Prove it to yourself: on paper, invest $1,000 before 5% is taken away. Imagine that the fund doubles over a period of years. Then compare the result to another fund that doubles your $1,000 but then takes away 5% when you sell. In both cases, you end up with $1.900.

It is important that investors understand and accept that investing is an art rather than a science. Therefore it is impossible to have an error-free investment life. NO amount of agonizing and extensive study will guarantee freedom from losses. For that reason, an investor should learn about investing and then gradually invest in a portfolio of various asset classes (stocks, bonds, real estate, hard assets, and international stocks/bonds) – but realizing all the while that their batting average will never be perfect. Many credible websites are available that provide information in the thousands of mutual funds available. We prefer the free sites, since paying for such information will not get you better results any more than paying a broker or planner 4.5% of your wealth will get you better mutual funds. We need to accept our human fallibility and do our best, rather than adopt the illusion that paying for help will guarantee superior results.

Several useful websites can help investors with learning about and selecting mutual funds.

Excellent basic educational material is available at www.ICI.org, the website of the Investment Company Institute.  The ICI, based in Washington DC, collects data, performs research, helps with self regulation by the industry, and testifies before congress and the SEC about proposed regulations and legislation regarding investor matters. Click on the “About Investing” tab on the upper right of the ICI’s main web page.

Excellent information in investing and in mutual funds is also available at www.MFEA.com, the website of the Mutual Fund Education Alliance.  Based in Kansas City, MO, the MFEA has fine educational materials (try the “Getting Started” tab at the top-center of its main page). It also provides a fund-selecting tool (“Fund Selector” tab). Here, we suggest clicking on “No-Load” as one of your selection criteria, for reasons noted   expanded its base recently to include a broader selection. Our preference is as stated.

www.PathToInvesting.org also offers some solid information, much in Q&A format, for individual investors. Try several of the relevant tabs at the left side of its main page. You will notice that one is “Working with a professional.”  That is because this website is provided by an affiliate of the Securities Industry Association (SIA), which is a long-established advocacy group sponsored by full-service (full-commission) brokerage firms. It should not be surprising that this site features load funds and encourages investor to consult brokers – both of which will involve higher costs than learning the art (not science, no guarantees!) of investing for yourself. Brokers of course do not get paid for selling no-load funds!

www.LipperLeaders.com is provided at no charge by one of the two oldest funds-rating organizations.  Its unique and quite useful feature is that it allows investors to screen funds on a combination of any of five independent variables: not merely performance but also tax efficiency, expense, preservation, and consistency of returns.  Rankings are in quintiles, from 5 (best) to 1 (worst) against funds with the same investment objective. The presentation is not quite as user friendly as that of the better-known Morningstar, but one can navigate it easily enough with minor practice. This site does not provide analyst recommendations.

www.Morningstar.com is better known and more extensive in its features, but the coverage universe is the same as that of Lipper. Some useful information is provided free of charge, but deeper analysis requires moderate ad-hoc payments or an annual or trial paid subscription.  Some controversy exists about five-star funds. A “white paper” study by competitor Lipper some years ago showed that four-star funds perform better because they are not already extremely hot and therefore prone to loss of momentum when investment tastes shift or bear markets set in. Both companies’ sites have their virtues, in our view.