Posts Tagged ‘learn’

When we have so many mutual funds to choose from, we often get lost in some of the irrelevant details. We seem to want to chase the next trend, the biggest or hottest sectors and so on. Bond funds, value funds, dividend funds; we talk about these specific investments right here on our site just as planner do with their clients. If we were looking at economic figures, we would call it micro-economics. But when it comes to investments and mutual funds in particular, taking a macro-economic approach might actually help tell us about where investors should steer their money.

If we look globally, for example, we see that the Japanese Yen has been taking a hit over the last week or so because of that country’s position on interest rates. Unlike the US where the economy is (finally) starting to grow and rates have increased (Fed Funds Rate) and are expected to continue to increase, Japan is looking to reduce rates so that people will borrow and therefore buy more. While this fiscal policy will devalue their currency, the implications for Japanese corporations, particularly those that export their goods, are actually very positive.

In fact, a devaluation in currency combined with increased foreign spending will have a turbocharging effect on Japanese companies that report their financial results in Yen. Not only will sales revenue increase, but if foreign dollars are being used to purchase goods, the currency conversion results in a forex gain on the financial statements.

This could be a bad thing in the long-term. As the Yen stabilizes and starts gaining in value again, the company may have forex losses which can offset or more-than-offset stable or even climbing revenues.

What this means for mutual fund investors that is that Japanese-heavy value mutual funds might be a safe bet for shorter-term gains. Why? Because the premise of a value mutual fund is that the securities held within the portfolio are undervalued. This can be based on any number of criteria, but are normally price-to-earnings, price-to-book (value), price-to-cash and so on and so forth. Ultimately, the fund manager will determine whether to include a security in his or her value fund, but the qualifying criteria will come down to one thing: the security is underpriced.

This security, mind you, can be equity or income based. Right now, investors would gain either way. Japanese bonds can very easily increase in value if rates start dropping. Japanese equities can also increase, but it could take more time before revenues start to increase and translate in to balance sheet strength.

Our next step is pick a value mutual fund that meets our specific investment objectives (with time and risk as the driving force behind such a decision).

Now this is a top-down investment approach. It is how the Mutual Fund Site comes across mutual fund recommendations. A financial planner and/or investment advisor will work this way as well. Except they do this by also understanding your goals and matching up your goals and beliefs as best as they can to the macro-economic situation.

A long-term investors who has a decent appetite for risk will be ill-served to keep all of his or her investments in domestic securities. It normally “fits” to incorporate foreign or global investments into the plan. It never (or it should never) involve finding a value fund and then justifying a reason why it makes sense.

With that in mind, buying any kind of mutual fund because of a recommendation is often the wrong approach. Taking a bottom-down, birds-eye approach to your investments always makes more sense.

Sifting through the reels of available mutual funds to include in your portfolio is no easy task. Investors are faced with so many options that it is literally very interesting to try to figure out why one person chose one fund and another with the same tolerance for risk, available time and investment objectives chose a completely different fund. That could be why some people who disagree with our Top fixed income pick (a high yield fund) and our top small cap pick might have different ideas (although we can’t imagine why).

But one of the things nobody can really argue is the following: to pick a mutual fund, whether it is one we like or one we have never even mentioned on this site, one needs to study the MAPS (Management, Assets, Performance, Strategy) of the mutual fund in question. These are just the basics, folks. Spending ten minutes or so to say you understand them will reward you will less stress between the day you invest and the day your statements arrives in the mail.

M – Management: Arguably the least exciting part of your review process, getting to know the management team behind a mutual fund is important. Why? Because management dictates the fund’s style, how the assets will be invested. This is also important to know if you are going to base your investment decision heavily on some past performance record. The thing with management is that as it changes, so does the investment style and often even the fund’s strategy; what might have been a small cap domestic value fund one year can change to a small/mid cap blend fund with a management change. So, management is very important. Google the manager’s name, visit the fund company’s website to see what he or she has published there. Again, not very exciting, but it will reveal more than you think.

A – Assets: Possibly the most exciting part of your research will involve digging into the fund itself and finding out what underlying assets make it tick. Our High Yield Fund pick for 2010 for example has a very pretty asset list, with strong companies and a strong yield. In fact, those assets were probably one of the driving forces behind our taking a much closer look at the fund. But to date, that fund has underperformed its peer group. The reason this does not concern us, however, is that we believe in the strategy of the fund and its management team is strong enough to keep to it. But still, if we did not know what those assets were ahead of time, we never would have looked at what we believe is going to be one of the best-performing high yield funds this year.

P – Performance: We all know that past performance is never indicative of future performance. However, it does give us a scorecard for how the fund has performed. This is increasingly important now because the market turmoil of the past 2 years and some can help us gauge whether the performance has kept up or lagged the benchmark. While important from a trending perspective, however, past performance is never something that alone should dictate whether to purchase a mutual fund.

S – Strategy: A mutual fund’s strategy is a lot like a contract. If a fund manager states that the strategy is one thing but the fund goes ahead and gets involved with something completely off-side, then it makes sense to “fire” that manager and find another. For this reason, you should get to know the mutual fund’s strategy rather intimately because it will form the standard to which you hold the fund’s management team accountable for its performance. And if that fund manager should stray from the stated strategy, then it becomes necessary to re-evaluate your relationship with that fund and fund company.

MAPS. Not hard to remember and not all that time consuming to execute. By keeping this abbreviation in mind when evaluating possible investment avenues, you will gain a fair level of comfort and knowledge about the mutual funds your planner might be pushing and know whether they make sense for you.

It is not all that difficult to learn to invest. In fact, as technology has evolved, so have the resources that help people invest, many of which are free including this site. However, there are certain investment fundamentals that people should understand as they start to learn to invest and, more importantly, to invest well.

Smart Investing is the product of a lot of information and analysis.  When investing in mutual funds, the process of analysis is made much easier, again thanks to the free tools available online. In addition, a lot of mutual fund companies will publish information about their funds, commentaries from their fund managers and overviews of their product offerings that allow investors to obtain highly relevant, timely, and important information about the investment in question.

You can learn to invest well by learning to read financial statements. Although mutual fund investments take a lot of the analysis out of your hands and puts the workload on the fund manager, understanding financial statements can help in determining where to invest. For example, one particular mutual fund might have a heavy weight in a particular stock. Wise investors will examine this security’s financial statements in greater detail to determine whether the fund’s strategy aligns with the investors’.  Although some sort of financial statement knowledge is recommended, it is not necessarily required as much of information that can be useful for the investor can be found in the notes section.

Know where to go for information. Part of the financial planner’s job is to know where to find information they need. Not surprisingly, a lot of the key information that a financial planner needs can be found online at free sites, such as Morningstar. If you invest in mutual funds, then the fund companies often offer a lot of great information. If you invest in your own securities, then you should know what particular sites you can visit that discuss such specific investments .

In other words, you can learn to invest well by understanding the information that particular securities/companies publish or, at the very least, where to find that information. Again, mutual fund investments take a lot of this analysis off of your hands, but that does not negate your need to find information about that particular mutual fund or the investments within the mutual fund.