Seven Sure Ways to Bigger Returns

If you're investing in mutual funds and looking for a way to improve your returns, Kiplinger's has some suggestions in an article called "Seven Sure Ways to Bigger Returns". Their suggestions are:

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. Even good funds can have a bad year or two. But you should sell when a bad patch becomes a way of life.

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.

3. Slim down your portfolio -- Asset bloat isn't a digestive problem. It's what happens when a fund manager tries to wolf down too much of your money. Asset bloat is good for a fund's sponsor because it means more fees. But investors often suffer because a fund that grows too large can lose the edge that helped build its reputation. Funds that invest in small companies are at greatest risk.

4. Take advantage of youth -- New funds tend to perform better than old ones. That's because they're small, giving their managers flexibility to load up on their favorite stocks without dramatically affecting the stocks' prices. New funds also don't carry a lot of baggage, such as a manager who is reluctant to sell because of tax consequences. You don't want to buy just any new fund. New funds that are run by proven managers or that are sponsored by large, reputable companies are your best bet.

5. Respect risk -- Risk isn't a four-letter word. There's nothing wrong with taking chances when you invest. In fact, one of the axioms of investing is that the greater the reward, the bigger the risk you have to take. Still, it's important to understand and feel comfortable with the risks of your investments.

6. Buy funds that put you first -- You can tell a lot about the culture of a fund company without ever visiting it. That's important because you want the management company working in the best interests of fund shareholders, not fund honchos.

The first question: How much does a fund charge? The expense ratio (annual fees as a percentage of assets) offers clues about a sponsor's priorities. Is it putting money in your pocketbook or stuffing its own coffers? In general, avoid stock funds that levy annual fees exceeding 1.5% (0.7% for bond funds). Money that goes to pay expenses comes right out of your pocket. On average, lower-cost funds produce better results than higher-cost funds, particularly over long periods. So as part of his newly serious approach to investing, Rich Tavis is paying closer attention to fund fees. "What's not to like about low costs?" he asks.

Next question: Do the managers have confidence in the way they manage money? Thanks to new regulations, you can find out. Managers must disclose, within ranges, how much of their money is invested in their fund.

7. Stay ahead of the trend -- Sometimes it's best to take a deep breath and invest in funds with uninspiring, if not lousy, records. Now is one of those times. Funds that invest in large fast-growing companies have, for the most part, performed poorly the past five years. (On average, large-company growth funds lost an annualized 8% during the period.) At the same time, funds that invest in undervalued stocks of all stripes performed admirably. But the tables are likely to turn soon. Growth stocks, a group that includes many technology companies, are now about as cheap as they get relative to value stocks on such measures as price-to-earnings and price-to-sales ratios. So this is a good time to place a little more than usual in large-company growth funds, even if their five-year returns are in negative territory, as most are.

How should you normally allocate your money? About half of the money you earmark for stocks belongs in large-company funds, evenly split between growth and value styles. Another 25% should be in a foreign stock fund or two. The final 25% should go into small-company funds, again evenly split between growth and value. How much you put into bond funds depends on how close you are to needing your money.

Indeed, most investors should decide on how to divvy up their money, then leave their funds alone. Sure, you want to dump the clunkers, as described above, and you want to rebalance your portfolio every six or 12 months. But jumping into a hot sector long after its rise has begun and then holding on past its peak, as investors tend to do, leads to inferior performance, as a recent Morningstar study underscores.

Morningstar found that investors consistently earned less than funds' stated returns. In the case of large-company growth funds, investors, on average, earned 3.4 percentage points per year less than reported returns over the past ten years. With more-volatile technology funds, investors' returns trailed by a stunning 14 percentage points per year. What accounts for this discrepancy? Simple. Driven by reports of fantastic results, investors typically pile into a hot sector after it has achieved most of its gains. By the time they've joined the party, the sector may be on the verge of heading down. The lesson: Take emotion out of investing decisions.

In addition to the summary here, Kiplinger's gives some fund suggestions and advocates the use of their fund-picking charts, so if you're interested in these, check out the article.

Comments

[YoungMiser]

These are all great ideas to remember when investing. I personally like investing in overall markets using ETF or investing in market indexes. I feel that the joe blow investor doesnt have the experience or does not take the necessary time to really understand a company and what their outlook is. I think a regular investor can get a grip around a particular industry better, along with getting a grip on various market indexes and also international index funds better. I think this way the investor still gets the up side, with a little less risk.