{"id":2125,"date":"2021-07-11T18:12:38","date_gmt":"2021-07-12T01:12:38","guid":{"rendered":"https:\/\/fightfirewithfire.net\/?p=2125"},"modified":"2022-12-23T15:28:33","modified_gmt":"2022-12-23T22:28:33","slug":"part-11-how-to-research-funds-like-a-pro","status":"publish","type":"post","link":"https:\/\/fightfirewithfire.net\/part-11-how-to-research-funds-like-a-pro\/","title":{"rendered":"PART 11: How to Research Funds Like a Pro"},"content":{"rendered":"\n
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Congratulations! In establishing your asset allocation, you have the cornerstone of your investment plan built, and the biggest decision you will make in portfolio planning behind you. Now that we have an allocation that is suitable for you\u2014based on your time horizon and personal risk tolerance\u2014the next step is to look at the fund options in your various investment accounts, and select those that will best fit your plan. Though fund selection can seem<\/em> complex, the goal here is simple: select the best funds from your options that match the asset allocation you\u2019ve chosen. <\/p>\n\n\n\n

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Though fund selection can seem<\/em> complex, the goal here is simple: select the best funds from your options that match the asset allocation you\u2019ve chosen.<\/p>\n<\/blockquote>\n\n\n\n

So, for example, if your allocation is 60% U.S. stocks, 20% international stocks, and 20% bonds, your goal is to \u201cfill up\u201d those parts of your portfolio using the best funds you have available. To do this, we need to know how to evaluate funds effectively, and I’m going to show you how in five easy steps. I will also give you a list of some of the best index funds (both mutual funds and ETFs) that I’ve found in my own research. <\/p>\n\n\n\n

Before We Get Started<\/h2>\n\n\n\n

Fund menus may differ widely.<\/strong> Depending on the types of accounts you have, the selection of funds you have access to might be limited. Typically, investors will find their options limited inside employer-sponsored accounts like a 401k, 403b or 457, and have a much<\/em> wider selection inside IRAs (both Roth and traditional) as well as taxable brokerage accounts. If you find your selections limited inside an account, don’t worry: your goal is simply to choose the best options available. Just do the best you can. <\/p>\n\n\n\n

Pay attention to transaction fees.<\/strong> No matter where you’re investing, I want you to be on the lookout for fees. Fees, such as commissions or transaction fees, can be downright corrosive to your returns, and you should always aim to minimize them. As we talked about in Part 8<\/a>, some brokerage firms charge additional fees for purchasing specific funds\u2014especially if the fund is not issued by that firm. For example, let’s say you’d opened an IRA at Fidelity, and wanted to invest in Vanguard’s Total Stock Market Index Fund (VTSAX). While you can purchase the fund there, you would be charged a $75.00 fee for doing so\u2014and this every time<\/em> you purchase shares. As you can imagine, this adds up quickly. You would be far better off either selecting one of Fidelity’s equivalent index mutual funds (which have no transaction fee, and are very competitive to Vanguard’s), or choosing Vanguard’s Total Stock Market ETF (VTI) instead, as ETFs also trade commission-free at Fidelity. Either of these options will save you $75.00 per buy, and over time, this can really make a difference. <\/p>\n\n\n\n

Those considerations aside, let\u2019s now get into fund selection. The best way to do this is simple. First, sit down and write out a list of all of your investment accounts. Leave space under each account for the best fund options you find. Then, as you review the fund options you have in each account, write down the best ones. As you go through your various accounts and start listing funds, be sure to also denote which asset class this fund will fall under (U.S. stocks, international stocks, or bonds). Let’s get started.<\/p>\n\n\n\n

How to Research Funds<\/h2>\n\n\n\n

So, how exactly do you determine if a fund is a good fit for your portfolio? As you can imagine, this question can get very complex, very quickly. There is an entire industry built up around selecting the best funds\u2014one with fun terms such as a fund’s “Sharpe ratio,” “factor profile,” or “price\/earnings (P\/E) ratio.” While this type of information all has its place (and for a nerd like me, it can be pretty interesting), we are going to keep things simple. This means that we are going to look at two broad considerations:<\/p>\n\n\n\n

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  1. Composition.<\/strong> The fund tracks an index, is broad-market, and is the right asset class for your allocation.<\/li>\n\n\n\n
  2. Costs.<\/strong> The fund keeps costs low. At a minimum, this means no sales loads, low expense ratio, and low turnover. <\/li>\n<\/ol>\n\n\n\n

    If you’re not familiar with these terms, that’s okay. We are going to evaluate each of these in-depth, using five easy steps. And to do this, I think it would be helpful to use an actual fund as a running example: Vanguard’s Total Stock Market Index Fund (VTSAX). We are going to pretend that we know nothing about the fund, and are learning about it from the ground up. We’ll go through each of those considerations, and see if the fund is a good fit for our portfolio. It’s important to note that the approach we’re going to follow works equally well for both mutual funds and exchange-traded funds (ETFs).<\/p>\n\n\n\n

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    We are going to look at two broad considerations: composition and costs, using five easy steps.<\/p>\n<\/blockquote>\n\n\n\n

    Several resources exist that will help in the process. One of the best that I recommend is Morningstar Research<\/a>, which is a fantastic site for researching mutual funds and ETFs. Another phenomenal resource for anything <\/em>to do with index investing is Bogleheads<\/a>. This site is packed with useful information on index investing; it has wiki topics on nearly everything, and a message board that boasts active, knowledgeable, and very helpful members. If you have questions throughout the process, posting here will get you quick, knowledgeable answers. And as always, feel free to use the contact form<\/a> on this site to reach me if you have questions I can help with!<\/p>\n\n\n\n

    One thing we need to cover before we start: we will be using what’s called a fund’s ticker symbol<\/strong>. Mutual funds and ETFs, as well as individual stocks, all have ticker symbols. Put simply, a ticker is a unique combination of characters that is used to identify an investment on the exchange. For our example fund, Vanguard’s Total Stock Market Index Fund, the ticker is VTSAX. We will be using this to access all kinds of information about the fund, and you will see others as we go. <\/p>\n\n\n\n

    Now that we’re ready, let’s get started with the first area of consideration: a fund’s composition.<\/p>\n\n\n\n

    Step 1: Benchmark Index and Composition<\/h2>\n\n\n\n

    The first thing we need to understand when we look at a fund is its composition. Remember that funds (both mutual funds and ETFs<\/a>) are simply collections of other assets\u2014such as stocks, bonds, and so on. So it’s vital that we understand what<\/em> we’re buying, and how well it fits into our investment plan. At a minimum, this means answering the following questions: <\/p>\n\n\n\n