Best mutual funds

[MINETZ]

Just turned 18 and recieved an inheritance of 20,000 and im planning to invest it in mutual funds, any recommendations?

[buffett]

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any recommendations?

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First read this speech (http://www1.gsb.columbia.edu/valueinvesting/research/public_archives/DOC032.PDF), given by Warren Buffett in 1984, so that you can understand that most mutual fund managers are "coin flippers." Then look around and pick one of the few funds run by a citizen of Graham-and-Doddsville, and your 28-year old self (and 38, and 48, etc.) will thank you for it.
-web

[cdxx]

since he wants to invest now and he is only 18 (i am assuming he hasn't had much investing experience), it's a bad advice for him to try to make sense of buffet's strategy.

with $20k, a good mutual fund is a good option. if you subscribe to buffett's views, putting $20k into Berkshire is a great option.

you are 18. open two accounts, one individual (brokerage/fund) and one roth ira. put the maximum contribution into IRA now ($4k) and the rest into the individual. however you find your funds, look for low or no load and no transaction fees. i would suggest having the $4k of ira funds invested "aggressively" (small/mid cap growth), and the rest of the funds split in some way between some "safer" funds (large/mid cap value, index or total market funds).

you can probably do well with aggressive stuff like emerging markets, diversified world, or international growth, but unless you are willing to pay attention to it every year and rebalance it when needed, and pick up on times to get out. for some safer bets, you can look into funds focused on utilities and commodities where you should expect steadier but slower returns, or you could go with health or financial sector which is a little riskier but certainly higher ceilings than the other two. i'd stay away from real estate or technology.

you should take the above as only my non-professional opinion, and it should not be the only advice you hear. in fact, if you choose to listen to it, it should be only only one of three or four opinions that you hear or options that you consider.

[Packerfan1]

American Funds are excellent.

If you want a no-help... sorry "no-load" fund family, Vanguard is one of the best.

Pack

[vindikation]

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First read this speech (http://www1.gsb.columbia.edu/valueinvesting/research/public_archives/DOC032.PDF), given by Warren Buffett in 1984, so that you can understand that most mutual fund managers are "coin flippers." Then look around and pick one of the few funds run by a citizen of Graham-and-Doddsville, and your 28-year old self (and 38, and 48, etc.) will thank you for it.
-web

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Great read, thanks!

[krishanleong]

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American Funds are excellent.

If you want a no-help... sorry "no-load" fund family, Vanguard is one of the best.

Pack

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I'm investing everything in American. I'm not 100% sure it's the right thing to do but it's nice to hear other say good things about them.

Krishan

[DesertCat]

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I'm investing everything in American. I'm not 100% sure it's the right thing to do but it's nice to hear other say good things about them.

Krishan

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Let me help you, it's not the right thing to do. First of all, some of the American funds have high fees, their A shares have a high front end charge.

The problem with most mutual funds is that you will trail the market over time. For a variety of structural issues (actively managed mutual funds are very poorly structured to beat the market), but mainly because they can't overcome the drag annual fees. This has been shown over and over again since the 1950's.

So your best choice is an index fund from a low cost provider, i.e. Vanguard is the usual choice. You won't beat the market and you won't trail. You'll match the market and beat over 95% of mutual funds over time.

The other option is a mutual fund run by a denizen of Graham and Doddsville, as Buffett mentioned above. These are guys (typically value investors) with 20 and 30 year records of beating the market through bear markets and bull markets.

But I'm a little leery of this option as well. First it's hard to find funds by the best of these guys that are still open to new investors (and some never were, they run private funds or public companies like Buffett). Secondly, if the main guy retires, what's your future expectation? In the case of the Clipper fund, the entire management team just left. But you can bet the management company will still sell "the clipper fund" based on the former managers record.

Secondly, as the word gets out, the fund gets bigger and bigger and it gets harder and harder to beat the market. Todays Fund King is Bill Miller of Legg-Mason, he's beaten the S&P 500 for 14 years straight. But he barely made it last year, and has fallen behind with three months left this year. Now that he's managing over $10 billion, I guarantee his best years are behind him.

No matter how good an investor runs it, a mutual fund offers such a terrible structure that it makes it difficult to beat the market. And that's without factoring in hidden fees, front end and back end sales charges, etc. Stick to index funds for now.

[buffett]

If this forum ever gets a FAQ or other sticky, I nominate this post from DesertCat to go in it. He sums up mutual fund investing, a topic about which many hundreds of volumes have been written, in just a few short paragraphs.
-web

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I'm investing everything in American. I'm not 100% sure it's the right thing to do but it's nice to hear other say good things about them.

Krishan

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Let me help you, it's not the right thing to do. First of all, some of the American funds have high fees, their A shares have a high front end charge.

The problem with most mutual funds is that you will trail the market over time. For a variety of structural issues (actively managed mutual funds are very poorly structured to beat the market), but mainly because they can't overcome the drag annual fees. This has been shown over and over again since the 1950's.

So your best choice is an index fund from a low cost provider, i.e. Vanguard is the usual choice. You won't beat the market and you won't trail. You'll match the market and beat over 95% of mutual funds over time.

The other option is a mutual fund run by a denizen of Graham and Doddsville, as Buffett mentioned above. These are guys (typically value investors) with 20 and 30 year records of beating the market through bear markets and bull markets.

But I'm a little leery of this option as well. First it's hard to find funds by the best of these guys that are still open to new investors (and some never were, they run private funds or public companies like Buffett). Secondly, if the main guy retires, what's your future expectation? In the case of the Clipper fund, the entire management team just left. But you can bet the management company will still sell "the clipper fund" based on the former managers record.

Secondly, as the word gets out, the fund gets bigger and bigger and it gets harder and harder to beat the market. Todays Fund King is Bill Miller of Legg-Mason, he's beaten the S&P 500 for 14 years straight. But he barely made it last year, and has fallen behind with three months left this year. Now that he's managing over $10 billion, I guarantee his best years are behind him.

No matter how good an investor runs it, a mutual fund offers such a terrible structure that it makes it difficult to beat the market. And that's without factoring in hidden fees, front end and back end sales charges, etc. Stick to index funds for now.

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WOW

[krishanleong]

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Let me help you, it's not the right thing to do. First of all, some of the American funds have high fees, their A shares have a high front end charge.


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I'm buying the A shares. Up to 100K fees initial fee is 4.5%. 100-200 is 3.5%, 200-500 is 2.5%. I will probably fall in the 3.5% category. The fund average fee is ~0.6 which I think is quite good compared to market average.

I rolled a 401K from a previous employer into a Vanguard Target Retirement 2045 Fund which has no fees to buy (I don't think, I've only done the rollover) and has a fee of .21 (very very low).

Would I be better off just moving everything over to Vanguard?

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Secondly, as the word gets out, the fund gets bigger and bigger and it gets harder and harder to beat the market. Todays Fund King is Bill Miller of Legg-Mason, he's beaten the S&P 500 for 14 years straight. But he barely made it last year, and has fallen behind with three months left this year. Now that he's managing over $10 billion, I guarantee his best years are behind him.

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One selling point for american is that it has multiple fund managers each managing a segment of the fund. This supposedly helps counteract the difficulty of managing large funds.

Thanks for taking the time to write out such a detailed and thoughtful response.

Krishan

[DesertCat]

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I'm buying the A shares. Up to 100K fees initial fee is 4.5%. 100-200 is 3.5%, 200-500 is 2.5%. I will probably fall in the 3.5% category. The fund average fee is ~0.6 which I think is quite good compared to market average.


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You should never, ever, ever, pay a front end sales charge. You are starting 3.5% behind, which is big hurdle for the typical fund manager, even with low fees. Low fees might compensate over many years, but if you change your mind in the next two, you got screwed. Which specific fund are you looking at?

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I rolled a 401K from a previous employer into a Vanguard Target Retirement 2045 Fund which has no fees to buy (I don't think, I've only done the rollover) and has a fee of .21 (very very low).

Would I be better off just moving everything over to Vanguard?


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The 2045 is a very interesting fund. You are relying on Vanguard to allocate between multiple indexes of bonds, domestic stocks and foreign stocks, changing the ratio as you get older and (presumably) become more interested in stability and income than best long term gains.

It's intriguing for several reasons. First you don't need to worry about changing allocations as you age, it's done for you. Secondly, it has 18% foreign stock exposure, which is probably good as long as we run deficits and devalue the dollar, your foreign holdings will benefit from foreign currency appreciation.

The only negative is the small amount of bonds (10%) will be a minor drag on your long term performance. Since you are so young, any long term investments could be 100% equities to maximize this performance. If that concerns you, you can just buy a "normal" index fund. If you still want foreign exposure, you could buy two funds, a U.S. index and a foreign index. If you do that I'd allocate about 75-25 in favor of the U.S.

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One selling point for american is that it has multiple fund managers each managing a segment of the fund. This supposedly helps counteract the difficulty of managing large funds.


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I don't know if that's true or not. If all the separate managers are equally good, it might be. But they seldom are, and if most of your gains are driven by a single team manager, will you know when he or she leaves? My guess is it's unlikely this approach will be better. Mutual funds know the criticism about their aggregate records, and this could be marketing spin to overcome criticisms like mine.

Which specific American fund would you be interested in? Let's look at it's ten year and longer records to see if their approach really works. Ignore short term results because a managers style can heavily influence that. Technology guys did great during the bubble, then gave all their gains back and then some afterwards. Guys heavy into energy have done well recently, and during the 70's, but about during the 80s and 90s?

If you choose an active manager, you want someone who can make money in good markets and bad. That means a 10+ years of solid success with the same manager, and without a fund getting too big. Bill Miller's funds at Legg Mason would normally be the best choice, but like I've said, how long can he continue to out perform with that big anchor tied to his back?

[cdxx]

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I rolled a 401K from a previous employer into a Vanguard Target Retirement 2045 Fund which has no fees to buy (I don't think, I've only done the rollover) and has a fee of .21 (very very low).

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yes, this is a very interesting fund, like your friend was saying. however, it does not invest into stocks, but rather adjusts its blend of mutual funds. so, the fee you pay is in reality compounded with the fees of those funds, which are themselves are low as they are Vanguard funds.

[cdxx]

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The only negative is the small amount of bonds (10%) will be a minor drag on your long term performance.

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this is not the only negative of this fund. this fund invests into other funds, thus even though this fund has a small market cap (<$500M), it actually does not enjoy the flexibility of that comes with it (mentioned in above post), as all of its money is in funds with huge market cap. all of vanguard's money is in four funds with market caps of $30B, $20B, $11B and $7B.

[DesertCat]

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this is not the only negative of this fund. this fund invests into other funds, thus even though this fund has a small market cap (<$500M), it actually does not enjoy the flexibility of that comes with it (mentioned in above post), as all of its money is in funds with huge market cap. all of vanguard's money is in four funds with market caps of $30B, $20B, $11B and $7B.

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Yes, cdxx brings up another good point about index funds. When we say they'll return the same as "the market", that a little misleading since few cover the entire market. Many index funds are S&P 500 funds, so you'll get the return of the 500 largest capitalization stocks.

You can also buy index funds that cover larger indexes (Wilshire for example) that include thousands of stocks, including many smaller companies. I'd recommend index funds covering as many stocks as possible as a general rule (as long as the expense ratio isn't out of control). There are some reasonable studies that show that smaller stocks will offer better returns over long periods time so you'd like at least some exposure to smaller stocks.

[krishanleong]

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Which specific American fund would you be interested in? Let's look at it's ten year and longer records to see if their approach really works. Ignore short term results because a managers style can heavily influence that.

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The majority is in AWSHX, CWGIX (30% each) with lesser amounts in AGTHX, ANEFX, SMCWX, and AWSHX.

If you want to save time, just peek at the first two. Thanks for the help.

Krishan

[DesertCat]

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The majority is in AWSHX, CWGIX (30% each) with lesser amounts in AGTHX, ANEFX, SMCWX, and AWSHX.

If you want to save time, just peek at the first two. Thanks for the help.

Krishan

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AWSHX -
Ten year performance is +1.28% over the S&P 500. It's lifetime is almost the same. Annual fees low, but partly due to a fee waiver they can discontinue at any time.

According to Morningstar, two managers have been there 20+ years, three for 10+ years, and three between 1 and 8 years. That's okay, but who provided the good ten year performance, did they leave or are they the guys who are still there?

I hate the sales charge, you should never have to pay a sales charge. But the class C, which has only a minor deferred sales charge, has an 1.46% expense ratio, meaning it return .8% a year less. In fact, I think half the reason the A Class beat the market is simply the low annual fees.

But it will take 3 years to earn back your sales charge based on their typical S&P outperformance. Compared against the Class C annual fees, it will take the A Class shares over 4 years to save enough in annual fees to make up for their sales load.

The good news is you selected a fund that's got a great long term record. The bad news is I don't know how to figure out whether the key members of the "team" that built that record is still there. And if they are whether they can continue at that pace, i.e. are they managing much larger sums of money now than before?

Those questions are why I always counsel punt and buy an index fund. You have a ton of choices that have rock bottom fees and no sales charges at all, and you never have to worry about managers leaving or ever trailing the market significantly. But if you have to go with an actively managed fund, this one appears much better than most (other than the high sales load that many funds don't have).

[krishanleong]

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But it will take 3 years to earn back your sales charge based on their typical S&P outperformance. Compared against the Class C annual fees, it will take the A Class shares over 4 years to save enough in annual fees to make up for their sales load.


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This is a long term investment for me. Barring massive medical bills it will be in there for a minimum of 15 years. Most likely it will be 20 years. I think for a fund that can beat the S&P consistently I can afford the load fee up front. Thanks for the advice. I really appreciate your discussion here.

Krishan

[kagame]

http://biz.yahoo.com/ms/050801/140253.html?.v=1

[lozen]

Mutual Funds expenses are just to high.

Buy a Index or Income Trusts