Deciding on an asset allocation can be a difficult decision, but once completed, selecting appropriate mutual funds to fulfill the chosen asset allocation can be ridiculously easy.
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ACEP Now: Vol 33 – No 07 – July 2014
Mutual funds sold by mutual fund salespeople masquerading as financial advisors also have loads, or commissions. These range from 3–8 percent of your investment. Some are front-end loads (A shares), paid when the money is initially invested. If you invest $1,000 in a mutual fund with a 5 percent front load, $950 goes into the mutual fund and $50 goes into the pocket of your advisor. There are also back-end loads (B shares), where the commission comes out when you sell the investment, and C shares, where the load is ongoing in the form of a higher expense ratio. However, because the best mutual funds have no load at all, there is really no reason to ever buy a loaded mutual fund. If you need investment assistance, pay a fee-only advisor for advice to minimize conflicts of interest. Be aware that most 401(k)s not only charge additional fees, they are often filled with loaded, high expense ratio, actively managed mutual funds. Do your best to avoid the most expensive options when selecting 401(k) funds. Remember that the very best predictor of future mutual fund performance is low fees.
Step 5: Avoid Performance Chasing
Academic studies have demonstrated time and time again that there is no persistence in performance among active mutual fund managers. Actually, that is not entirely true as the worst managers do persist in being terrible. Investors are notorious for buying high and selling low, dramatically underperforming the funds they are invested in due to their terrible timing. The solution is to avoid timing the market at all. Rather than choosing a fund (or an asset class) based on its past performance, simply follow your written investing plan. If your plan says 30 percent of the portfolio should be invested in U.S. stocks and due to recent market changes your portfolio is only 25 percent U.S. stocks, then buy some more to rebalance the portfolio. This forces you to buy low and sell high.
Following these five steps when choosing a mutual fund will help you reach your retirement and other investing goals.
Dr. Dahle is the author of The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing and blogs at http://whitecoatinvestor.com. He is not a licensed financial advisor, accountant, or attorney and recommends you consult with your own advisors prior to acting on any information you read here.
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4 Responses to “5 Steps to Help Physicians Choose the Right Mutual Fund”
August 13, 2014
Healthcare Business Transition News: August 2014 - Strategic Growth Advisors LLC[…] Dr. Jim Dahle joins ACEPNow to discuss steps physicians need to take in choosing mutual funds that will help them reach their financial goals. Mutual funds provide benefits like diversification, economies of scale, and experienced fund management that aren’t available to physicians navigating the market on their own. Dr. Dahle goes into detail on topics including matching funds to asset allocation, stepping back from active management, capturing market returns, managing costs, and avoiding chasing performance. Read the article in its entirety here. […]
September 16, 2014
home[…] Dr. Jim Dahle joins ACEPNow to discuss steps physicians need to take in choosing mutual funds that will help them reach their financial goals. Mutual funds provide benefits like diversification, economies of scale, and experienced fund management that aren’t available to physicians navigating the market on their own. Dr. Dahle goes into detail on topics including matching funds to asset allocation, stepping back from active management, capturing market returns, managing costs, and avoiding chasing performance. Read the article in its entirety here. […]
September 17, 2014
stratgrow | Healthcare Business Transition News: August 2014[…] Dr. Jim Dahle joins ACEPNow to discuss steps physicians need to take in choosing mutual funds that will help them reach their financial goals. Mutual funds provide benefits like diversification, economies of scale, and experienced fund management that aren’t available to physicians navigating the market on their own. Dr. Dahle goes into detail on topics including matching funds to asset allocation, stepping back from active management, capturing market returns, managing costs, and avoiding chasing performance. Read the article in its entirety here. […]
March 4, 2015
stratgrow | stratgrow[…] Dr. Jim Dahle joins ACEPNow to discuss steps physicians need to take in choosing mutual funds that will help them reach their financial goals. Mutual funds provide benefits like diversification, economies of scale, and experienced fund management that aren’t available to physicians navigating the market on their own. Dr. Dahle goes into detail on topics including matching funds to asset allocation, stepping back from active management, capturing market returns, managing costs, and avoiding chasing performance. Read the article in its entirety here. […]