Avoid Surprises

Make sure you look under the hood before buying a fund

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Choosing mutual funds to build your portfolio can be a complicated task. Performance and ratings help but they are not predictive. It is easy to invest in a fund that has had a good track record only to be disappointed in the results after you own the fund. Here are some of the criteria we use when selecting funds for our clients:

Turnover – How often does the fund manager buy and sell stocks in the portfolio? Many investors look at the expense ratio of a fund but stop there. Trading costs are not included in expense ratios. Most experts estimate the cost of turning over a portfolio at 0.25 to 0.3%. Therefore a fund that has 100% turnover is adding another ¼% or more to the internal costs. This doesn’t take into consideration the price movement that occurs in the share price of the stocks the fund is trading. Large trades in a stock can push the price up when the fund is buying and down when they sell the position. A lot of turnover can also produce a nasty surprise at tax time for investors who own shares in a taxable account. Turnover can also produce capital gain distributions. High turnover shouldn’t automatically cause you to reject the fund but it should prompt you to buy those shares in a tax-deferred account.

Concentration – Some funds produce outstanding performance by concentrating the portfolio is one sector and sometimes in just one security. Picking the right sector or security can vault the fund ahead of their peers on performance rankings. The opposite can happen when the manager buys the wrong positions. Look at the fund weightings before investing. A sector position of more than 30% or a single stock position of more than 15% in the portfolio increases the risk in the fund.

Neither high turnover nor over concentration should automatically exclude a fund from consideration. Make sure you review this information during your research.

Will Your Money Last Through Retirement?

No one wants to run out of money. But without goals and a solid plan,
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Will I be able to maintain my current lifestyle?

What will my monthly income be in retirement?

Can I protect my hard-earned savings and still
have the income I want?

Rodgers & Associates answers questions like these every day.

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2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437