Pick a winning mutual fund

Once the foundation of your overall financial plan is built (bills up to date or debt-free, 3-6 months cash in the bank, and a working budget so you know how much you can afford each month) it's time to pick a fund!

First, do you understand what a mutual fund is? Essentially, a mutual fund is a formal investment partnership. The fund manager decides what financial vehicles his or her fund will invest in, and then investors buy shares in the fund if they're convinced that the manager's goals are in line with their own.

Mutual funds can include collections of stocks, bonds, commercial notes, and many other financial issues traded in our economy. Investors should understand what they are investing in, and the risks associated with buying shares in a mutual fund. Don't just look at the average return, look at the fluctuations in value over long periods of time.

Stock mutual funds are also very different. Some trade in a particular sector of the economy, like energy or industrial production. Others trade in a broad range of stocks that divide the markets by company size. Still others buy portions of virtually the entire stock exchange. These are called "index" funds. These funds often have low expenses because the fund managers don't have to do any research or analysis of the stocks they select--they buy everything!

So, how do you pick a winning mutual fund? I recommend that you start by setting up a money market mutual fund at a low cost brokerage firm. I chose Schwab 20 years ago, and while they aren't the least expensive, I've always appreciated their level of service and support. Many companies will let you open accounts with very low costs as long as you allow a certain minimum to be withdrawn from your traditional bank account periodically.

Once you have opened your account, use the company's research materials to educate yourself on your choices. You can also use Yahoo! Finance to begin your learning. Yahoo!'s tools are very easy to use and give you access to information that was only available to brokers just a few years ago.

Cash should be piling up in your brokerage account while you continue your research. This is helpful because many funds require you to open a new account with at least $1000. There are exceptions, however. My quick review of the Yahoo! mutual fund screener of US stock funds with no minimum investment and no load (or sales) fee turned up 8 funds. These were:

CNGIX CNI Charter Large Cap Growth Eq Inst
CNLIX CNI Charter Large Cap Value Eq Inst
NMPAX Columbia Mid Cap Index Z
WGICX Credit Suisse Trust Large Cap Value
DFMVX DFA Tax-Managed U.S. Marketwide Value II
GSMCX Goldman Sachs Mid Cap Value Instl
JGLTX Janus Aspen Global Technology Instl
VPGRX Vantagepoint Growth

Next, I take a look at the track record of the funds I've found. I'm looking for funds with a 5 year track record under the same manager (for an actively traded fund.) Then I compare that fund's results against the benchmark exchange traded fund in the same segment of the market.

Here's an example: Take the Dimensional Fund Advisors' product, listed above (DFMVX). It's manager, Robert Deere, has been with DFA since 1991 and managed this fund since 1998. The fund cost are very low (.28%) compared to others in this sector. Compared with the Dow Jones' Industrial average, this fund has outperformed the average over five year, but underperformed in during the last 12 months. Since I take a 5 year (or longer) this fund would pass all my requisites for further consideration.

Once you have a short list of funds, you can look at more practical considerations. Is this fund in a large family of funds so you can easily branch out later, or is it only available through a broker? How responsive is the fund to phone inquiries? In short, is the fund easy to open and easy to work with?

For me, I've found that using Schwab's fund selection tools, and limiting my choices to funds that offer no sales charges or transaction fees, I quickly arrive at a manageable list of choices.

If this process sounds complicated, it is only because of the extensive list of choices available to us today. It's tougher to invest in a mutual fund than it is to buy a car because there are so many fewer car options!

I believe, however, that fear prevents many potential investors from picking their first fund. Once you make that leap, you'll understand the process and continue a lifetime of investment.

It's a great time to start investing!

The markets have continued to fluctuate significantly throughout the spring and summer of 2008. Overall, the market is down for the year to date, meaning that there are bargains to be had. I have continued to stay focused on our 20 year+ plan of dollar cost averaging into the global equity markets while adding a small bond position to reduce our families overall risk.

If military families have been staying on the sidelines waiting for the market to get more expensive, I think that it's time to get in. If you cannot afford to risk short term reductions in your investment, or are likely to abandon your strategy if the market trends lower in the next 6-months, then you are probably not ready to start investing in stocks.

The foundation of a financial plan is stability (being up to date on all your bills and obligations), a buffer to absorb fluctuations (an emergency fund of 3-6 months of total expenses), and a reasonable budget that allows you to determine how much money you have to invest each month. If these steps are not taken care of first you'll likely have to pull money from your investments before they have had time to grow.

BOTTOM LINE: If your "primary 3" building blocks are built, now is a great time to jump in and begin building your nest egg.

In my next post I'll discuss a great fund to start with.

Moving is expensive!

We're just finishing a PCS (permanent change of station) move, and boy is it tough on the wallet. We do receive a significant dislocation allowance, but there are so many expenses that are not covered that it's a big drain on your savings.

When you're due to move it's a great idea to set up a separate savings to help defray these expenses. A good figure is one-month's pay. Earmark this money for your move and you'll be ready on moving day.