Understanding Investments is like a Pie!

This past weekend, while speaking at a conference for widows, I was asked about my mutual fund recommendations and what resources I could offer to help them understand their investments.  



As you recall, last week you were given an assignment to create an list of your investments. Today, I will share a few steps to help you dissect your portfolio and determine what you own, as well as, how it fits into your overall protection plan.

1.What is a mutual fund?  Think of your mutual fund as a pie.  It contains many different companies (slices) that come together to make the pie.  Based on your objective (risk level) you will have different pies within your portfolio.  All these different pies with different objectives are what we call asset allocation. Most often the fewer pies you own, the more risk you are taking on.

2. Mutual Fund Symbol.  For each mutual fund you own, a symbol is used to identify it.  There are two ways to look this up:                                                                    

  • Look on your statement
  • Use google and type in the name of your mutual fund along with the share class. Most often A ,B, or C. (For example:Investment Company of America CL A)

On your inventory list, write down all the symbols for each mutual fund investment you own.

3. Morningstar.  This is a leading provider for independent investment research on more than 380,000 investment offerings.  At the top of their website is a search box to input a Quote for your mutual fund. Once entered, a report will populate. Here are five main things to look for:

  • Star Rating.  Each mutual fund is rated from one to five stars on how well they perform in comparison to similar funds.  A five star is the best  (NOTE: no rating will be given to a fund that is less than three years old)
  •  Expenses.  There are two types to be aware of and can be found at the top of your report, next to the quote.  First the Load expense is a commission percentage that you paid to invest in the mutual fund.  Second, you will see Expenses which simply means what you pay annually to the mutual fund.  You do not write a check out for either one of these expenses, rather they are paid internally.
  • Morningstar Category.  This will state the overall underlying objective of the companies you own.  ie Large Growth, Small growth etc…
  • Performance.  This will tell you how the mutual fund performed historically.  The 5 year number is critical to ascertain how the managers are doing relative to the market since 2008
  • Professional Management. Tenure is very important in determining the quality of the management of the fund.  We like to see managers with experience of 10 years or more.

As you are reviewing the morningstar report you can get a full listing of definitions here.

4. Protection.  Most often, the fundamental investment goal is to obtain the highest possible return while assuming the lowest amount of possible investment risk.  The key to accomplishing this is to structure your portfolio with the appropriate balance of aggressive, moderate, and conservative investments.

For example a 40 year old will have a much different risk tolerance than a 65 year old would. Why?  The younger individual has a longer time horizon to experience the probabilty of positive returns that will offset the likelihood of several negative returns.  

So go ahead, and take a deeper look into your investment pie. Do you like what you see?  

Question:  What are your thoughts you have on the different types of investments?  You can leave a comment below.