If you own a lot of mutual funds this next bit of news isn’t going to exactly make your day. The fact is, the vast majority of them underperform the average return of the stock market. The simple fact is that it’s probably a good chance that you own one of these underperforming mutual funds. In fact, most Americans do because most 401(k) plans will only let you invest in mutual funds.
What this means is that it’s up to you to decide whether or not you’re going to just accept the substandard returns that your mutual funds are giving you or whether you’re going to become enlightened about the rights that you have to get returns that match the market.
The question now that you have to ask yourself is whether you should stay invested in mutual funds or look for greener pastures. If you recall the binder that you were given when you signed up for the 401(k) plan at your company or the quarterly mailings that have been coming to you since you opened your IRA, the first thing you’re going to want to do is grab those and start going through them for critical information that they hold.
Be prepared for some of the most confusing, boring and dry language you’ve ever encountered. Somewhere in that confusing mess you’ll find wording that describes not only your fund’s investment policy’s but also their objectives, their risks and, most importantly, their costs. You’ll also find historical performance data and all sorts of legal mumbo-jumbo.
You can also go online to find all of the information that you need about your various mutual funds, along with all sorts of data and analysis on the thousands of them that happen to be out there. Once you do there are 5 specific things that you need to start looking for in those reports.
- Management changes. One of the most important things about a mutual fund is that it has a long-term and stable manager. In some cases you’ll find changes but, no matter who’s in charge, it’s always important to know exactly who’s handling your money.
- Fee changes. Another key factor, you should be aware that mutual funds are NOT required to keep their fees at the same level that they originally started at. One of your jobs as a fund shareholder is to make sure that the fees for your mutual funds don’t keep increasing and, if they do, consider dumping them.
- Style changes. If the mutual fund that you have in your portfolio is known for purchasing slow growth, high dividend blue-chip stocks and they suddenly start buying stocks from a nameless startup that just entered the market, you definitely will want to know about it and keep an eye on your fund’s holdings. If you purchased it because it was assigned one label and it suddenly starts changing style to another, you need to know about it and make changes when necessary.
- Turnover changes. A mutual fund with lower than average turnover rates is much more preferable to one that turns over on a regular basis. Rates of 50% or lower are best. Index fund turnover can be as low as 5% for example.
- Performance changes. While this one is a little bit more difficult the fact is that underperformance, even on a relatively frequent basis, is not unusual or particularly unexpected even with a good fund. The reason we mention this is that just because your funds might have had a bad quarter or even a bad stretch of a year or two, you might not particularly want to dump them. Track performance of course and, if you see poor returns over a five-year period, it might be time to start looking in another direction.
Noteworthy changes in any of these areas may mean it is time to reassess the mutual funds that you hold in your portfolio. It doesn’t necessarily mean that you have to automatically sell them because, in some cases, these changes might be for the better. In other cases they might not be positive but they’ll be better than the ill effects that selling will cause.
If you’re truly keen on keeping track of your mutual funds and increasing your returns, the 5 areas above are definitely what you should be looking at regularly. Reviewing them quarterly is a great idea so that it becomes as automatic as changing the oil in your car or giving the house a thorough cleaning.