What Ron Burgundy Teaches Us About Mutual Funds (Hint: It’s not an old wooden ship)

Ron Burgundy believed that diversity was old wooden ship, but diversity is also a great reason to invest in mutual funds. (kinda wish that they would have asked Brick Tamland for his opinion).

I answered this question on Quora.

To answer this question, I’ve explained mutual funds and also provided a tool you can use to find the best performing mutual funds. Prateek Mehta makes a great point in his Quora response, which is that there no specific mutual fund for every investor. Also, keep in mind that past performance does not guarantee future performance.

What’s a mutual fund?

You can think of a mutual fund as a bucket of money, which contains the invested dollars of thousands of individual investors, and a mutual fund invests in stocks, bonds and similar assets. The big advantage for you, the investor, is that you can participate in an investment that owns dozens (maybe hundreds) of individual stocks and bonds.

Investors can limit risk by diversifying between multiple investments, and mutual funds can do that you for.

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Investment objective

Each mutual fund is managed by a portfolio manager, and the fund must be managed to meet the investment objectives stated in the fund’s prospectus. Before choosing a fund, you need to consider these factors:

• Time horizon: How long are you investing for? Are you saving money to buy a house in five years? Maybe retiring in 20 years? You need to be clear about your time horizon, because that will impact how much cost you’re willing to pay to invest- and how much risk you’re willing to take.

 

• Risk tolerance: If the value of your investment portfolio declined 20% in one year, is that something you could live with? How about 10%? When most people think of investment risk, they first consider the upside- the possible gains. In my view, your first consideration should be the possible losses. Also, the longer you have to invest, the more time you have to make up for any losses.

 

• Your time investment: How much time are you willing to invest to monitor the performance of your mutual funds- and consider making changes? If investments are new to you, you’ll have to invest more time up front to understand the process. If you don’t have a lot of time- or if you’re inexperienced, consider paying a fee to an investment advisor who can track the performance of your portfolio.

 

Now that we covered some key factors for mutual fund investing, let’s move onto three mutual funds that are currently high performers. (Note: The date of this post is 7/13/17, so performance will obviously change over time).

Morningstar: A mutual fund ratings tool

Morningstar is a great site for mutual fund investment performance information. When you go to the site, click on Funds on the top bar, and you’ll see research and current stories on mutual funds. I would recommend signing up for the site (it’s free), so you can log in for more detailed statistics. The log in is in the top right corner.

Once you log in, go to Tools and click on Fund Screener. This is a tool that uses filters to find the type of fund you’d prefer. I’ll use the filter to find a specific mutual fund, and explain its investment objective. I’ll provide a link to the fund’s prospectus, which is an SEC-reviewed document that provides disclosure to investors. You can click the prospectus link and read dozens of pages, if you want.

American Funds Washington Mutual Investors Fund

Washington Mutual is one of the oldest and largest mutual funds in the country. It focuses on stock issued by large, US-based companies. Morningstar has a fund ratings system from 1 to 5, so I picked a 4-star rating is a filter. Finally, I chose an expense ratio that was in the low range (less than or equal to 1%), and use that as a filter. Here are some of the important features of this fund:

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• The bluest of the blue chips: Blue chip stocks are large companies with recognizable names- firms that sell products that you buy all the time. Think Proctor and Gamble, the people who make Crest toothpaste and dozens of other products. Because these companies have large brands and a big share of the market for products, they can generate pretty consistent sales and earnings. So, over time, the stock price can increase- but slowly.

 

• Performance: It’s a standard practice for a fund company to list their performance over the most recent 1, 5, and 10 years. You’ll note on the first page of the website that performance is “net of fees” (after fees are subtracted).

 

• Investment objective: Read the fund’s objective and see if it matches your personal investment objective. This fund’s objective is to produce income (through dividend payments) and to provide an opportunity for growth or principal (you original investment is the principal) that is consistent with sound common stock investing. Slow and steady- and not flashy.

 

Now, if this fund doesn’t meet your needs, use the Fund Screener tool to find a stock fund that takes more risk- or maybe a fund that invests in bonds.

 

You now have the tools to find great performing mutual funds on your own. I highly recommend consulting a financial advisor before making any final decisions.

Good luck!

Ken blogs at Accounting Accidentally.com. 

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Image: Wall Street Two Signs, Terrapin Flyer, Wall Street (CC BY-SA 2.0)