The Feeling's Mutual

5 Tips for a Great Portfolio Relationship

The staple of any investor’s portfolio is the mutual fund. A mutual fund is a collection of securities (stocks, bonds, and sometimes money) usually managed by a financial company. Before you learn about individual stock analysis and the like, you should really focus on your foundation, and generally, mutual funds are the start. Think of it as your “Investments for Real Life, 102” that everything will be based on moving forward. Got it? Well let’s begin. What is the best way to guide your decision about investing in a mutual fund? It’s almost like a good relationship.

1. The Return – You want more out than you put in. This is the primary (but by far not the only) screener. You should look for funds with the highest returns. Most fund-screeners do a good job of this for you. However, a return is arbitrary unless you compare it with…

2. Experience. Good relationships survive through thick and thin, and don’t turn tail when things get a little dicey. The next and perhaps most important step would be the consistency of said returns. If the fund has not been around for at least five years, don’t even deal with it. Stick with something that’s proven. Combined with #1, you want a fund that’s been around through the ups-and-downs of the stock market and has returns that are consistent and high.

3. Low Turnover. Anytime you trade a stock (which is what most mainstream mutual funds do) there are taxes incurred on any gains made in the stock, called capital gains. For instance, if a stock is bought by a mutual fund owner at $20, and it’s sold a $25, a 20% tax is levied by the government on the $5 income gained. A company that trades in and out of stocks in your mutual fund very often can build up large capital gains taxes that they pass on to the consumer. Therefore, stick with a company that doesn’t obsess over trading in and out of the stock market. Low in this instance is based on a scale from 1-100, and the smaller the number, the better.

4. Low-Maintenance. Maintenance fees are the fees charged for “running” the mutual fund. It’s like the “cost” of the relationship. The best option is to choose a fund with low maintenance fee/expense ratio (anything below 1.5% is good.) It’s also good to stick with funds that have low (or no) loads attached to running the fund. However, sometimes the load and fees may be worth it, but it depends—if the loads and fees eat into you returns to the point where they are at or below the annualized return of the S&P 500 for a 10-year period or more, drop it. If the fees are low but the returns are also low, this is not a good choice either. You want to find the “sweet spot” where the fees are reasonable and the returns are greater than the S & P 500. Otherwise, its best to pick up an index fund, which meets average market returns and fees are lowest.

5. Patience. Obsessing over a relation is the quickest way to kill it—even if the relationship seems “good.” The old adage says fire needs air to burn. If you want your stock returns to stay hot, then leave it alone! Don’t trade into and out of different funds, and don’t go chasing rates every year. There will be down years (remember the dot-com crash), and significant drops and significant gains (the last year or so)—it’s the nature of any relationship—financial or otherwise! Stick with what works, and let it be. Then you can enjoy Life’s Other Pleasures without obsessing over money and retirement. Leave that to the day-traders and the folks on Wall Street.

For more info on how mutual funds work, go

here (Wikipedia) or even

here (Fool.com).