Welcome to our first lesson our new series – How to Invest Without a Planner. The purpose of this is to walk you through the process of investing from the very beginning. I will be teaching investing in mutual funds as this is in my opinion the best way for beginners to get started (and for those with no time to monitor their investments.
I will take you through researching funds, monitoring the funds for performance and altering the diversification of the fund as it grows, plus you will learn what all the terminology means.
I am beginning this journey as if this is my first investment so we don’t have to start with details on establishing a balance among the different styles of funds such as domestic stock and international and bond! We can get to those as we learn more and have more money!
I am also starting this search as if we were investing on a monthly basis for under $100 each month. This way anyone can get going with their investing – cut out a pizza and an extra $25 can start working for you each month.
In this first part we will begin to look for the perfect fund! This will take more than one post to do a good job in finding a quality fund. When I am researching the next fund that I want to invest in it takes me approximately 4 – 8 hours. Don’t let this scare you off though – I am look at lots of funds and usually re-research my existing ones first.
Research Tools
For the research part of looking for a mutual fund I prefer to use Morningstar ($20 off a one year subscription for an Annual Premium Membership at Morningstar)* for all of my research, it is easy to use, unbiased and you can save your searches so that you can continue to return and look over a period of time. (I have been using them to research and evaluate my portfolio since 2001).
They have both a paid option and a free option. The free version is just not as detailed as the Premium version so it takes longer to go through all of the funds. From a management point, the premium version allows you to look at your existing portfolio as a whole which is nice once you have more money located in different funds and accounts. (For details on how to use the Premium screener check out the series on YouTube or here!)
Beginning the Search
The goal for today is to get to a manageable number of funds that can be searched one at a time.
This is the criteria that I started with:
1. The fund is older than 10 year. On the screener this will look like Fund Inception date is greater than today’s date 10 years ago. For today that is Fund inception <= 1/04/2001
2. Morningstar rating is a 5, 4 or 3. I choose this because it will take out the bottom of the funds. I don’t take Morningstar’s word for everything, but I can at least base my research off their top selections to help minimize the number of funds.
3. Fees and Expenses are less than 1.47% – I don’t like paying any fees as that reduces my return on the investment. There are wonderful funds out there with low fees so there is no need to pay higher ones!
4. Closed to new investment. I make sure that is equal to no, otherwise you are picking a fund that you cannot investment. Funds close to new money if they feel they cannot manage the money properly with the level of funds that they are at.
5. Minimum Purchase (for automatic investing) equal to or less than $100. Since we are going to be investing a small amount we want this number to be as low as possible. We look for the minimum on automatic investing as that is usually lower than the regular minimums required. They do this because they know that you are signing up for regular injections of money and your account will grow automatically.
6. Category equals domestic stock. To begin investing I recommend starting with a basic growth fund with US stocks.
7. Role in Portfolio equals core. The two options are core and supporting. Supporting is more of a specialty fund like bank only stocks. Core is more of a basic fund that covers many companies and has a general goal. To start our investing we need to establish core funds before we begin to specialize, thus creating more balance. Core funds also tend to be less risky.
8. Fund Manager Tenure = 2 years or more. I like to use this criterion as the results and direction of the fund are likely to follow the same line. You can see how they have done compared to the market. It to me creates more stability in what you are reviewing as you don’t have to worry about a new manager changing the course of the fund.
9. Trailing returns for 10 years is greater than the category average.
10. Trailing returns for 15 years is greater than the category average. I use this one and the one above to show that their long term returns are better than their peers. And that this is done on a consistent basis.
With these criteria we have narrowed our list from thousands down to under 25 funds. Our next stop is to start to evaluate those funds one at a time. Remember this is just the criteria I like to choose. As we go through this we will learn more about all the options for searching. Learn about each and decide what is most important for you.
Happy Investing!
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