When you sign up for your employer’s retirement plan and it allows you to select mutual funds, you could be presented with a laundry list of mutual funds or a very limited choice of mutual funds.
So what do we do? We ask friends and possibly relatives for advice and go to Smart Saving and Investing to get some help. 🙂 Then we question our choices, ask our co-workers what we should do and just close our eyes and pick something.
Well, that’s the way I did years ago when I first started out investing in my employer’s retirement plan. No one really knew what to do. There was no Internet around to help do research. You could read trade magazines until your eyes turned red and you still didn’t know or understand what the heck to make of it all.
On top of that your co-worker ended up day-trading in and out of their mutual funds based on the economic news of the day, which is the worst thing you could possibly do and there are now provisions in place to help stifle that type of trading behavior.
So here we are today with a whole gamut of websites, blogs and every type of media to help figure things outs…or still continue to confuse the same person starting out in mutual funds under their employer’s retirement plan.
Well, I’ve narrowed it down to using a couple sites, namely Morningstar (a very well trusted site on financial data and news) as well as Fund Alarm. Fund Alarm allows you to look at a fund by typing in the symbols of the fund, let’s say FMAGX for Fidelity Magellan and quickly find out if it’s considered one of their “3-Alarm” funds.
At Fund Alarm, a “3-Alarm” fund can be considered a sell this fund immediately or do not buy decision. Here is a screen shot of Fidelity Magellan from Fund Alarm.
Notice the areas I circled. You can instantly tell that Fund Alarm considers this a “3-Alarm” fund. Here is their link that helps you determine if you should sell this fund or not. The second, bigger red circle displays the fact that the fund has underperformed its benchmark the Vanguard 500 Index for the last 12 months, last 3 years, and last 5 years. Which is not good. You want to match or handily beat the benchmarks used to compare your funds.
So unfortunately I would have to say don’t buy Fidelity Magellan at this time and if you’re currently holding it, get rid of it first thing in the morning!!
Now, let’s take a look at a fund and use Morningstar and Fund Alarm together to do some quick research and decision making. Our choice today is PRGFX – The T. Rowe Price Growth Stock fund. This fund falls into the Large Growth category.
From previous posts you might remember I favor this asset allocation for 2007:
- Large Growth – 35%
- Large Value – 20%
- Small Growth – 20%
- Small Value – 15%
- International – 10%
The selection of funds where someone chose PRGFX was a company that only offered employees 20 different funds to get into so it can be tough when you don’t have a bunch of choices.
So let’s take a look at PRGFX at Fund Alarm:
Now this one looks very good at Fund Alarm. You can use this link at Fund Alarm to read about “How to Read the Fund Alarm Data Table.” It tells us that it’s a “NO-ALARM” fund and has beaten its benchmark (the Vanguard 500 Index) for the last 12 months, last 3 years and last 5 years. That looks very good and it would be one that I’d pick for the selections that were allowed at this employer.
Here’s the “Snapshot” page from Morningstar:
You can see the red line on the chart shows us that funds performance for the last 5 years…almost, because 2007 isn’t over yet. So with Morningstar they like to compare a lot of funds to the S&P 500 as its benchmark. Also, the data at Morningstar is more up to date than the Fund Alarm site. If you look closely at the date of the data reported on PRGFX at Fund Alarm you see “Data as of 5/31/07”. Morningstar is reporting as of 6/30/07.
Notice the Fund YTD (Year-To-Date), 3 year and 5 year under the Morningstar chart. This is the percentage (12.05, 15.01 and 14.96 respectively) of return on the hypothetical $10,000.00 that Morningstar likes to use over those time periods. Under those figures are the positive numbers that indicate how much the fund beat its benchmark during those times. Again, Morningstar is using the S&P 500 as the benchmark in this case.
Well, hopefully you’re not completely confused and there are lot of terms to think about and discover. I only presented a portion of the Fund Alarm site and Morningstar site. You can get into much more detail at the Morningstar site.
I hope this article presented some useful data and techniques to use when evaluating the mutual funds in your life. Let me know if you have any comments or questions and we’ll get them answered together.
If you want to make this process extremely easy then browse over to Smart 401k and pay for them to select your funds for you if you can afford to. Smart 401k you’ll answer a short questionnaire so they can determine what type of an investor you are and then they’ll email you the recommendations based on your fund choices and what type of investor you are as far as risk is concerned.