Mutual Funds
7 Sure Ways to Bigger Returns
Are your mutual funds suffering from the blahs? It's time to whip them into shape. Start by putting your portfolio on a diet -- by dumping the slackers and asset-bloated funds -- and adding some energetic new replacements.
By Steven Goldberg, Contributing Columnist
From Kiplinger's Personal Finance magazine, September 2005
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Rich Tavis didn't really have an investment plan. When he saw an attractive fund or stock, he'd buy it, almost as if he were collecting shells on a beach. Tavis made some investments on his own and others through a broker. "To be honest, I don't think I had much of a strategy at all," says Tavis, 34, a Minneapolis high-tech electronic-equipment salesman.
But Tavis recently got with the program. He took time to research funds and build a solid investment plan. He sold some duds in his portfolio and started to pay more attention to such matters as the fees funds charge. "Like anything else important, I just had to make a priority of investing," says Tavis. "I really feel as if I'm on track now."
You can get on track, too, by focusing on results rather than fund names. These seven suggestions are for beginners and veteran investors alike, and most are keyed to the exclusive Kiplinger rankings found in the September issue of Kiplinger's Personal Finance
1. Dump the slackers
Treat a bad fund the way you would a bad relationship: Get out -- and the sooner, the better. But identifying a lousy fund isn't as straightforward as it might appear. Don't just look at raw results. Rather, focus on how a fund has performed relative to others that invest similarly. The decile rankings show how more than 1,000 funds have done on a year-to-year basis when ranked against funds with the same investment style.
Even good funds can have a bad year or two. But you should sell when a bad patch becomes a way of life. "I had a couple of American Express funds [now called AXP funds] that were dogs," Tavis says. "I've been rolling that money into American funds, because they're better than anything I've ever had."
An excellent example of a once-great fund that has lost its way is Fidelity Magellan. It has been in the bottom 30% of its peer group -- so-called large-blend funds -- in four of the past five years (read more about Magellan below). Other funds with consistently poor year-by-year rankings compared with similar funds include Columbia Mid-Cap Value, Gabelli Value, Smith Barney Dividend Strategy and Van Kampen Emerging Growth. If you own any of these funds, consider selling.
2. Learn to love consistency
The mirror image of the previous rule: Look for funds that consistently produce above-average results. When you invest in funds that regularly show up in the top half of their peer group, you'll almost certainly have identified funds with superior long-term results.
Few funds are so consistently good. (You can use the tables in our September issue to identify funds ranked 1 to 5 within their categories for four or five of the past five years.) Four good choices are Brandywine Blue (symbol BLUEX), Fidelity Export and Multinational (FEXPX), Hodges Fund (HDPMX) and Selected Special Shares (SLSSX). Selected, in particular, shows the benefits of consistency. Although its annualized return of 1% over the past five years (a period that covers the 2000Ð02 bear market) may look uninspiring, that gain is seven percentage points per year better than the average return of other funds that invest in fast-growing midsize companies.