When it comes to making investment decisions and preparing for retirement, many investors fall prey to snap judgments based on a mutual fund’s star rating or simply become overwhelmed by information overload. The good news is that there is a middle ground that can help you navigate your options and make informed decisions. The following six considerations — all of which can be easily found on a Morningstar (MORN) fund report, can help you assess your investment options.
1. Read up on your funds’ portfolio managers. The captain of a ship controls the fate of passengers just as a portfolio manager of a mutual fund is in control of the individual investor’s financial journey. Therefore, it is important to review the manager’s tenure and the performance of the fund since they’ve been the “captain” of the portfolio. If performance has steadily improved or declined over the course of their tenure, that may tell you something important.
With a bit of digging, you’ll find details on a fund manager‘s experiences and background that can be telling. If the manager has overseen the fund for less than two years, I like to look into their prior experience managing money in the same investment category (for example, large cap, small cap, bonds, real estate investment trusts) as well as past investment performance. If they were successful in a similar category, it should give you confidence that they have the experience necessary to “steer the ship” on the fund they currently manage.
2. Understand the asset allocation of your investments. You should understand your portfolio’s asset allocation (stocks, bonds or cash) for each fund in your portfolio. In both good and bad market conditions, portfolios can drift into more aggressive allocations than previously established when you first began investing. The key is to have a mix of stocks, bonds and cash within a portfolio that matches your risk profile/tolerance, financial goals and time horizon.
3. Look at a fund’s top holdings. The top holdings can be a great barometer for how the fund will perform in different market scenarios. For example, you may notice that a particular fund has several technology stocks within its top 10 holdings. In a market where technology stocks are showing strong performance, your fund is allocated to perform similarly. Unfortunately, it can also have the opposite effect. If technology stocks “trade in the red” even on an up-day in the market, you could see your holdings in the fund perform flat-to-down for that session.
4. Dig into new holdings and largest position changes. Exploring a fund’s new holdings and largest position changes will illuminate the number of shares that have been added or subtracted since they were last reported (typically every three to four months). Based on that information, you’ll better understand how the fund manager is investing new cash into the fund. Finally, you might even want to put a few of these companies on your personal “watch list” to follow in the event you decide to buy an individual security as well.