Investors often come to our asset management consultants with questions about mutual funds; which ones should I buy? Should I consider past performance? How much will I -- or should I -- pay in management fees? Does manager tenure matter?
It's easy to understand why so many clients have questions about these investment products.
When you're in the market to buy mutual funds, it's essential to start with a thorough understanding of your own investment goals, then work with your wealth advisor to determine which funds have the best chance of helping meet those objectives. Here's what to consider.
Asset Allocation: Key to Your Wealth Management Process
Allocating your assets is key to building a properly diversified portfolio that may help:
- Reduce your exposure to unnecessary risk,
- Decrease fluctuating returns; and
- Capture returns
But in order to allocate properly, you have to understand your investment goals. While every investor's situation is unique, factors to consider include:
- Time horizon
The time you have left before retirement may play a role in determining the types of funds you choose and how you allocate the assets in your portfolio. As a general rule, the amount of risk you expose your portfolio to is inverse to the more funds you require over a short time period. Keep in mind, however, that today's retirees are living longer than ever; the funds you invest today may need to support you for thirty years after you leave the workforce.
Choose Mutual Funds that Meet the Goals of Your Comprehensive Financial Plan
Once you've determined your investing goals, it's time to identify the financial strategies you'll employ to pursue those objectives. Again, each investor's situation is different, so there's no cookie-cutter approach.
While many retirees choose investment strategies that decrease exposure to risk, that's not always the most efficient asset management solution. For instance, say a retiree's spouse has a robust pension that meets most day-to-day financial needs; their portfolio may benefit from more risk. Knowing your personal risk threshold will help you choose between types of mutual funds, such as equity funds or bond funds.
Investors also need to consider the differences between index funds and actively managed funds. Index funds -- or passively managed funds that track the performance of an index, such as the Nasdaq or S&P 500, offer many advantages such as broad diversification and low fees.
Speaking of low fees, don't overlook a fund's expense ratio, which includes management fees and operating costs. Research shows a correlation between lower fees and higher performance -- and vice-versa. Demand a clear accounting of what you're paying for.
Don't Base Your Financial Strategies on Past Fund Performance
Though past historical performance may seem like an indicator of future performance, that's simply not the case. In fact, it's impossible to accurately predict the future performance of a fund -- and an investment professional who tells you otherwise isn't necessarily on the up-and-up.