How I Selected a Mutual Fund; a really boring case study.

Posted by in Articles, personal finance | 15 comments

Retirement

Retirement

I’m coming into an age of conservation – I guess both with money and ecology. After a decade of risky financial moves (running a hot dog stand, starting a business,  creating a mobile portal) I’ve become slightly risk-adverse as I’m approaching my *gulp* 40′s! Getting a late start on my building my retirement nest egg, I decided I needed to balance out my pension and my very small stock portfolio (on the aggressive side of investing) with something stable and more conservative: a mutual fund.

Not all mutual funds are considered conservative, many are quite aggressive in nature depending on the type of investments the mutual fund consists of. For instance, some mutual funds consist of stocks, where others balance stocks, cash, and bonds. I learned this through months of research, comparing and contrasting mutual funds through MaxFunds.com. This site analyzes the quality of the fund, predicts the potential gain and loss and calculates the annual cost. I was also able to use Morning Star, another fantastic site, to compare historical graphs giving me a holistic picture of the type of growth I can expect over the next 10-15 years.

I knew I wanted to use my insurance company as my broker. I do quite a bit of banking and insurance services with them and they allowed me to select particular funds that waived the initial investment amount as long as I set up auto-debiting. This limited me to a handful of funds, excluding me from taking advantage of index funds. However, I still had enough of a selection to choose from. After reviewing three potential funds (2 equity and 1 taxable bond) that I was intrigued with, I decided to select the safer more conservative fund; the taxable-bond fund. It’s backed by the US government – steady growing and safe, for now.

At a historical growth rate of approximately 7% and a total cost of .01% annually, the safety outweighs the cost. I used CalcMoolator to calculate my total cost, which was important to me as one of the biggest complaints about mutual funds is that they are costly. Another benefit of mutual funds is that they are very easy to set up and I knew I had more flexibility with them versus an IRA. My insurance company’s online website makes it easy for me to add additional funds, transfer and sell funds very much like a stock. The changes I make are immediate, giving me peace of mind in case I decide to switch over to a more aggressive fund.

My initial monthly auto-debits won’t make me wealthy, especially after I factored in what I’d need during retirement using a retirement calculator (scary, to say the least!), but it’s a start towards a financially stable golden era. Of course, I could always retire in Belize and not worry so much about saving millions! ;)

Are you investing in mutual funds? Have you researched which funds are best for you?

15 Comments

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  1. MoneyCone

    The best part of a MF is the flexibility of moving around dollar amounts instead of shares. I miss that with ETFs!

  2. krantcents

    Getting started is more important than the choice. Monitor your fund’s performance for a year, you can always change, transfer or add another fund. Remember what outcome you are trying to achieve.

    • Little House

      @Krantcents – The outcome I’d like to see with this particular fund is slow and steady growth. If all the data I researched is accurate, this fund should do that. But that’s what’s nice about an MF, I can move it to something else if it doesn’t work out. ;)

  3. retirebyforty

    I snorkeled that spot! It was awesome! Great start on your mutual fund portfolio. Do you have to pay transaction fee every time you add money to the mutual fund? That would add up.

    • Little House

      @Retireby40 – One of the reasons I chose my insurance broker and this particular fund is I don’t have to pay a transaction fee when I move money around or add to it. It is barely managed, so the management fees are minimal, .1%. There aren’t any loads and fees associated with this account (not that I really understand this lingo – but MaxFunds is great about keeping the description and info simple!) MaxFunds estimates that if I accrued $10,000 in 3 years my average cost would be $139 over that period (only 1.39% if I’m doing my math correctly) but my annualized return would be about 3.12%. I think this is okay for now.

  4. Travis@TradeTechSports

    I like how you mentioned the cost of the mutual fund. Many people see the yield or gains on any given year and their eyes light up, but after paying management fees and other costs, you may not be doing that much better than some no-load, no tax type funds.

    • Little House

      @Travis – I think that’s why I loved using MaxFunds, it was easy to see an average cost and return. Though the fund I picked is definitely a slow grower, the fees are so low it shouldn’t affect my profit much. Also, no load fees!

  5. Hunter

    I’ve got my spousal IRA (I’m the spouse) set with a target date fund. It rebalanced automatically and is well diversified for me. I know many other investors prefer to be more hands-on, but I’m happy with this arrangement for the time being.

    • Little House

      @Hunter – I looked at target fund dates when I researched mutual funds. These look very interesting, I’ll have to investigate these a bit more. Thanks for reminding me about these!

  6. Eliza from Happy Simple Living

    Interesting article, and congratulations on starting a new long-term investment. With consistency and perseverance you could totally be snorkeling in Belize and enjoying your golden years in the tropics! :-)

  7. Financial Success for Young Adults

    My older cousin is facing the same dilemma. She started a little late and is checking out mutual funds now to get started building a retirement fund. How else did you evaluate the fund?

  8. Jacob @ My Personal Finance Journey

    I’ve never heard of using an insurance company as your broker. Did you look in to Vanguard or Fidelity? They provide some really high quality, low cost mutual funds.

    • Little House

      @Jacob – No, it’s not fidelity or vanguard. (I’m actually afraid to disclose too much personal information, but I could email you if you really want to know the company) It’s the same insurance company I use for most of my insurance needs and they offered mutual funds with no minimum if I set up auto-debiting. They are a great company, open mostly to military/government workers. I was grandfathered in to the company by my step-father who was once in the Air Force.

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