Every once in while you read something that’s a real eye opener, it takes a complex topic and provides a simple solution.
The Wisdom of Brackets, BusinessWeek, March 26, 2007 is in this category. This article applies the NCAA playoff bracket approach to selecting investments. Don’t laugh, the idea is pure genius. The concept is to list all your investment alternatives in pairs, select a “winner” from each pair and move on to the next round. For mutual fund investors, some of the “teams” will be cash, long term bonds, U.S. Big Cap funds, foreign funds and so on. (The article is not mutual fund focused and puts too much emphasis on foreign investments and derivatives but the concept is equally applicable to mutual fund investing.)
Investing can be a mind-boggling experience. Evaluating the many different categories of mutual funds (I’ve never counted but there’s probably well over 100) is overwhelming. Which funds to buy? Will I be diversified? What’s my risk tolerance? Help! I’m not an investment professional. The answer is to break this task down into each step – the smaller, the simpler, the better.
That’s beauty of brackets. It’s a commonsense approach to evaluating investment alternatives, diversifying your investments and provides a gut check on your risk tolerance. Just jot down you investment alternatives in pairs and you’re on your way. As you compare two fund categories you’ll be intuitively weighing factors such as risk and diversification. Once you’ve finished with your first bracket, go to the next round. I suggest stopping at the elite eight, since you want to be diversified in your investments. Certainly don’t go beyond the final four.
Try it. I think you’ll be both pleased and surprised with the outcome. The bracket approach doesn’t tell you which funds to buy but once you know the type of fund you can look at a
top ten best performing fund list or run a
fund screening tool to find the right fund for you. These lists and tools are available at
www.mutualdecision.com. The brackets you’ll have to do for yourself.
Posted
03/28/07
by
Bill Byrnes
Last week was a good week for the Dow, although it’s still below its level of a month ago and it still faces the problems we’ve previously
written about (and others). What’s an investor to do in this uncertain environment? Don’t try to time the market and invest for the long term are the obvious answers. But, what to invest in? Mutual funds, of course! They can help you reduce your investment risk in three ways:
- Professional management. These guys come to work every day to mange your investments. Well, that’s partially true, they come to work to make a living and part of their job is to grow their assets under management but they do spend more time managing their funds then you or I can spend on our investments.
- Diversification. Most mutual funds are well diversified. You might not have the assets (or the time) to build a well-diversified portfolio. And, in this increasingly interconnected world, your portfolio might not be as diversified as you think.
- Target investments. Mutual funds enable you to pick investment categories, i.e., big cap stocks, foreign stocks, short term bonds, and that’s a good thing. It helps you match your risk tolerance and investment objectives.
Most funds try to stay fully invested and not time the market. If you don’t believe in the 25 second shot clock for investing that’s good but it also means that most funds will go down when the market goes down. Don’t panic, don’t try for the three point shot, and don’t foul out.
Posted
03/26/07
by
Bill Byrnes
It seems like private equity funds are buying up the whole world. Two more deals were announced yesterday. Two banks announced they were discussing a merger, the day before. I’m grouping private equity buyouts and mergers & acquisitions in the same category because the results are the same for the investor who’s smart (lucky) enough to own the stock of the company being acquired. There’s usually a significant jump in price upon the announcement of a deal. How can you, the mutual fund investor, partake of this feeding frenzy? My first response is don’t try – it’s like looking for a needle in a haystack. And, I have to believe that the private equity bubble is soon to burst.
Having said that, if you’re curious as to how to get in on the “fun” here are some suggestions. You can buy a mid-cap value fund. Most buy-outs have occurred in the mid-cap arena and, presumably, among undervalued companies. You also could consider buying a sector fund in one of the industries where there has been more private equity or M&A activity. Retailing, REITs, and banks spring to mind. But remember, sector funds are riskier than broadly diversified value funds. Please see my posting titled
Yellow Sub(prime)marine for a discussion of sector funds. Where can you find a list of top performing mid-cap value and sector funds? (This is a shameless commercial for our web site.) Try the
MUTUALdecision Research Tool. By the way, if any of you know of a fund that specializes in buyouts or M&A, please let us know.
Posted
03/21/07
by
Bill Byrnes
We all live in a subprime world and like a submarine, danger to your mutual fund portfolio could be lying beneath the surface. It looks like one or more of the subprime lending companies may not make it and the disease is spreading to prime mortgage lenders, banks and brokerage houses. If you own a high income fund, financial institutions/bank/thrift/brokerage house fund, or a real estate fund, the subprime meltdown is effecting you.
The subprime debacle illustrates the importance of two mutual fund investment rules:
- Review the holdings of any fund you own or are thinking of buying. The top holdings are available for a number of sources, including by looking up the fund on the MUTUALdecision website. The fund itself must publish a complete list of holdings each quarter. You can't go by the name of the fund alone. You need to review its holdings to determine its risk level. For example, one financial institutions fund may own predominately blue chip banks, while another may have a significant exposure to, gasp!, subprime lenders.
- Sector funds are more concentrated then general market funds. That’s both good and bad. If you pick the right sector, you'll do very well but if, for example, you're invested in a sector fund such as a financial fund with a big subprime mortgage exposure, well, you see my point. So just remember that sector funds are riskier investments.
Posted
03/14/07
by
Bill Byrnes
