How do you choose a new mutual fund? (bond, IRA, mutual funds)

[snowmountains]

How do you know which fund to decide to buy the first time? Do you know a lot of research before buying the initial position?

[hyuk17]

Originally Posted by ssww

How do you know which fund to decide to buy the first time? Do you know a lot of research before buying the initial position?

Evaluate expense ratio costs and turnover costs. You will quickly discover that index funds are the lowest cost. This is why they consistently do better.

[mysticaltyger]

Originally Posted by ssww

How do you know which fund to decide to buy the first time? Do you know a lot of research before buying the initial position?

Here, I will save you the research. If you are investing for retirement, I highly recommend a balanced fund. Balanced funds own a mix of stocks and bonds, usually 60% to 70% stocks and the rest in bonds and cash. They don't do as well when the stock market is roaring, but they hold up much better in stock market downturns. They're funds you can (and probably should) hold for decades, if not your whole lifetime.

I would be a lot richer if I would have started and stuck with a balanced fund instead of switching around from fund to fund. Inevitably, you'll buy and sell funds at inopportune times. It's the way our brains are wired. Everyone thinks they won't be the person who does that. Almost all of them are wrong (myself included).

The tricky part here is there is more than one good choice and you can obsess forever about which one is best. So I'll just recommend one. It has a low expense ratio and excellent long term returns. It isn't the absolute best in the balanced fund category, but it's typically in the top 10% of performers over long periods (10 years or more). It's been around since 1929. It has a low expense ratio of .26%, which drops to .18% once your balance hits $50,000. It's 20 year returns have actually beaten those of the S&P 500 Stock Index, with less volatility, although that may not be the case over the next 20 years. That fund is:

Vanguard Wellington.

You have to open an account with Vanguard to buy this fund at www.vanguard.com

After you buy this fund, your focus should be on earning more and saving more, so you can invest as much as you can in the fund. Investing is fairly boring. To be a good investor requires consistent behavior more than anything else.

While not an index fund, Wellington's expenses are only a shade higher than a typical index fund (the next cheapest actively managed balanced fund, Dodge & Cox Balanced, charges .53%--more than double what Wellington charges--and it's still considered cheap compared to other funds).

The problem I have with people saying "index funds" is which index are we talking about? There are indexes for every specialized corner of the stock and bond markets these days. You can make your investing life pretty complicated with lots of different index funds if you want to. Just a small sample:

Vanguard REIT (real estate) Index
Vanguard Extended Market Index
Vanguard S&P 500 Index
Vanguard Total Stock Market Index
Vanguard Total Bond Market Index
Vanguard Balanced Index
Vanguard Mid Cap Index
etc, etc.

I think it's easier to buy one fund and get 80% of your diversification that way. Not perfect, but good enough, and simpler than putting together index funds.

I also think actively managed funds are fine if their expenses are as cheap as Wellington's. The problem is, most of them are charging .90% or more....but if you can get an actively managed fund for only a small premium, then it's worth it. Most actively managed funds would match or beat their respective index benchmarks if they charged fees comparable to Wellington.

[hyuk17]

Keep it simple. S&P 500 + a total bond market index fund + maybe 20% in an international stock index.
John Bogle remains a staunch advocate of low-cost index investing, saying that over time the benefits are huge compared to mutual fund investing. In the 40-year period that ended in 2008, a $10,000 investment in a low-cost S&P 500 index fund would have grown to $346,117. Over the same period, the average managed domestic equity fund grew to $201,513.

[snowmountains]

Thanks all. I've never taken expense ratio seriously enough. I thought better performance wiould outweigh that, so I kept looking at performance ranking, but it keeps changing, of course.

[mysticaltyger]

Originally Posted by ssww

Thanks all. I've never taken expense ratio seriously enough. I thought better performance wiould outweigh that, so I kept looking at performance ranking, but it keeps changing, of course.

I am not obsessed with the absolute lowest expense ratio like some here, but the evidence is in...... the mutual funds with expense ratios in the lowest 25% tend to do the best over time. That doesn't mean you have to buy an index fund, but it almost certainly means you should buy funds with below average expense ratios for their category. There will always be some average or higher cost funds that do well, but there will always be a few exceptions. It's better to stack the odds in your favor with a below average cost fund.

[hyuk17]

Originally Posted by ssww

Thanks all. I've never taken expense ratio seriously enough. I thought better performance wiould outweigh that, so I kept looking at performance ranking, but it keeps changing, of course.

Index funds have been beating actively managed fund consistently for years, and that includes factoring in fees. Typically it's about 1% per year that you lose.

[froglipz]

[mysticaltyger]

Originally Posted by hyuk17

Index funds have been beating actively managed fund consistently for years, and that includes factoring in fees. Typically it's about 1% per year that you lose.

There's nothing wrong with index funds, but there is a small but consistent percentage of actively managed funds that do just as well or better than the S&P 500 stock index with the same or lower volatility. The vast majority have below average expenses and stable management. Here are a few examples of funds open to new investors that have beaten the S&P 500 Stock Indexes (Vanguard Institutional Index fund used) returns of 8.94% over the past 20 years and their returns and expense ratios:

MAPOX / Mairs & Power Balanced: 9.46% / .72%
MPGFX / Mairs & Power Growth: 11.89% / .65%
DODBX / Dodge & Cox Balanced: 9.49% / .53%
DODGX / Dodge & Cox Stock: 11.00% / .52%
VWELX / Vanguard Wellington: 9.25% / .26% (Admiral share class charges .18% with balance of 50K)
VEIPX / Vanguard Equity Income: 9.62% / .29% (Admiral share class charges .21% w/ balance of 50K)
FBALX / Fidelity Balanced: 8.94% / .56%
FMILX / Fidelity New Millennium: 13.13% / .81%
FLPSX / Fidelity Low Priced Stock: 13.00% / .82%
FCNTX / Fidelity Contrafund: 10.99% / .64%
PRBLX / Parnassus Core Equity: 10.17% / .87% (Cheaper expense ratio of .67% with balance of 100k)
TRVLX / T. Rowe Price Value: 10.47% / .82%
TRBCX / T. Rowe Price Blue Chip Growth: 9.75% / .72%
PRFDX / T. Rowe Price Equity Income: 9.00% / .66%
TWEIX / American Century Equity Income: 10.10% / .93%
OAKMX / Oakmark: 9.41% / .87%
OAKBX / Oakmark Equity & Income / .74%. This fund isn't quite 20 years old but has beaten the S&P 500 Index since its inception on 11/1/95. 10K invested since inception would now equal $73,366.54 vs. $51,721.28 for the S&P 500 Stock Index.

The below listed funds have above average expense ratios but have still matched or beaten the returns of the S&P 500. I can't really recommend them because of their high expenses:

Amana Income 8.95% / 1.14% (Cheaper share class that charges .90% with balance of 100K)
Amana Growth 10.54% / 1.09% (Cheaper share class charges .87% with balance of 100K)
FPA Crescent 10.43% / 1.15%

I got all my 20 year performance data from MAXfunds.com | A better way of looking at mutual funds.