‘Recommended’ Lists Not Your Personal Best
About the only thing investors need less than another new mutual fund is another list of mutual funds.
But that hasn’t stopped Money magazine, which, with its June issue, purports to have created the ultimate list, the Money 100, supposedly of the best mutual funds in existence.
Money suggests the list is needed because the outstanding performers have gotten lost in a sea of pretenders. New funds are being created not because they are innovative, but rather as a marketing ploy to attract more money, it says.
Hmmm, that sounds suspiciously like the list itself. It may sell magazines, but it’s hardly a great help to investors.
For proof, put the list to a test for all generalized advice from either the mainstream media or investment newsletters. Ask, “What do I do next with this information?”
In the case of the Money 100, the answer most likely is “Nothing.”
Regardless of the quality of the funds on the list, look at the facts:
* You aren’t going to go out and buy all 100 funds. Simply adding a few to your portfolio isn’t the answer, either, since that is likely to simply increase the number of funds you own without enhancing overall performance.
* You wouldn’t dump your funds for failing to make the list. (None of my funds did.) Chances are you won’t replace the funds you own unless their performance has been mediocre and the tax consequences of the change would be minimal.
* If you want a specific type of fund, like a large-cap growth fund, Money’s list still leaves you about two dozen choices, which might as well be the entire universe of 10,000 funds if you don’t know how to select one that’s right for you.
And therein lies the problem with any touted list of investments: It’s not about you.
Money claims to have looked at each fund from every conceivable angle. But naturally, that’s an exaggeration. And it forgot to ask you, personally, about your tolerance for volatility. For one thing, there are no bond funds in the list.
Such flaws could make this a list of the worst funds for you to own.
Some investment newsletters try to overcome this by offering several different portfolios, such as one for people in retirement, another for folks saving for college, and so on.
“You can’t pick up a list of the 100 best funds and assume it applies to you,” said Janet Brown, editor of the No-Load Fund-X newsletter.
“You can’t make much use of any list like that without doing some preliminary work on yourself, your allocations and the way you want to plan for your portfolio.”
Having failed the “What do I do next?” test, put generalized advice to a second, less stringent standard. Ask, “How can I use this information?”
Typically, the answer is “As a starting point.” In Money’s case, if you know there is a hole in your portfolio, such as international funds, you have a pretty good group of funds to choose from to fill the gap.
So don’t examine any recommended list until you have reviewed your own portfolio and found areas in which you actually need suggestions.
You don’t want excessive overlap in a portfolio, nor do you want to own too many funds, so lists can help only if they point to areas in which your portfolio is thin.
From there, the best way to weed the choices is to approach recommendation lists backward. Instead of looking for reasons to buy, look for ones to knock things off the list.
“Every investor should have their own personal checklist of what constitutes a good fund, of what is important to them,” said Steve Janachowski of Brouwer & Janachowski, an investment advisory firm in Marin County. “These are the characteristics you want to see in a fund to be comfortable with it.”
Things to consider include track record, manager’s length of service, whether the fund has grown to a ridiculous size, if the investment style has remained consistent, expense ratios, sales charges, turnover rates and tax efficiency.
If you don’t want funds less than 3 years old, for example, you eliminate nearly 20% of Money’s list. If you want only funds that tracker Morningstar Inc. rates as carrying the lowest risk among their peers, you eliminate 91 funds on the list.
Put together your own criteria and you can whittle any list down to a manageable size. So long as you trust the source of the recommendations, your choice should be a comfortable one.
And if you eliminate all of the recommendations, that’s OK too. It’s a sign that your selection criteria and those of the makers of the list simply aren’t in sync.
Keep searching. With so many funds out there, you’re bound to find something that makes your very own, personalized list.
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Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, P.O. Box 2378, Boston, MA 02107-2378.
