Five thousand? Ten thousand? Twenty thousand? The number of fund choices is in the thousands. Choose too many and your portfolio is without clear focus. Choose none at all and you will struggle to achieve a diversified portfolio. Identify the number of funds that suit your long-term financial goals.
The following seven steps won’t guarantee that you’ll become rich but they’ll give you a useful process for choosing suitable, low-cost investments funds that have experienced reasonable past performance.
Investing starts with knowing your investor profile. If you haven’t determined yours yet, see Discover Your Asset Mix/Investor Profile. Since the ability to take on investment risk differs from person to person, knowing your own level is most important because it should determine the types of investments to hold. You have to be able to sleep at night and not worry about your investments. Determine how much you should hold in each asset class before you start picking funds.
In 2011, 29% of non-senior Canadians were receiving investment income.
Identify what role your funds will play in building your portfolio. Are you best served with one fund that complements your stock portfolio or with a comprehensive pre-built portfolio fund (one fund combining many funds)? Will you build your portfolio by combining multiple funds? Are you looking to add a specific asset subclass fund to your suite of funds?
Once you have identified your objectives, you'll want to consider:
For more detailed discussion of this topic, see Build It: Construct Your Portfolio.
If your intent is to buy one pre-built, balanced or multi-manager fund, limit your review to only those types of funds. If you’re building your own portfolio, you should evaluate funds from each asset class and each technique or strategy (such as, fixed income, Canadian, U.S. and international equity funds, and so on). Do a quick review or use a filter to assemble a short list. Read the investment reports or the prospectus for each fund to compare and contrast funds on your short list.
Investment fund reports are an excellent way to research funds. They are available from many websites. Some of the topics you want to pay attention to include:
Finally, compare the fund to others you may hold or are considering for purchase. Would this new fund complement or simply mirror what you already have?
At the end of the day, you should be able to answer the question: “Has this fund delivered superior risk-adjusted returns compared to similar funds and has it done so consistently over a reasonable period of time?”
Past performance is no assurance that future performance will be comparable. However, historical returns are frequently used to:
Learn how to Measure Past Performance.
Costs are important. A high annual fee reduces the investment return. Cost should always be considered when choosing a fund, but so should returns. If a manager can consistently deliver superior “after-fee” returns, then he /she is earning the fee, regardless of what it is. If available, take advantage of reduced fees offered in employer pension or savings plans.
There are two costs to consider when looking at different investment funds. They are:
Learn how to evaluate your investments to keep fees and other costs down.
As outlined in High-Risk vs Low-Risk Strategies, a disciplined approach to investing, using logic and reason, is a lower-risk strategy than an emotional approach. However, removing the emotions from investment decisions can be difficult (we are all human, after all).
Investing is about risk AND return. Be aware of both.
With thousands of investment funds to choose from, the selection of the most suitable fund for an investor is a challenge. While intuition might work, a systematic approach plus a firm grip on emotions generally work out better in the long run.