You are sitting in an investment adviser’s office contemplating your future.
Are you thinking about how much money you are going to make or when you can quit your job and become an artist? If yes, I’ll forgive you, but rap your knuckles at the same time.
What you should be doing is asking questions. Last week I said there was no such thing as a stupid one. This week let’s look at few you should pose about mutual funds.
Here are seven to get you started.
1. Is the fund’s fee (the management expense ratio or MER) lower than the category average, i.e., is it lower than those of its peers?
2. Has this fund been around for at least five years?
3. And speaking of peers, how has the fund performed against its group sisters and brothers? It should be in the top 25 per cent over time.
4. Also, has this fund outperformed its benchmark index (every fund can be compared to an index like the S&P 500, for example) over its lifetime? There are thousands of funds; no point in buying a lemon.
5. You also need to know exactly what you are buying. Does the fund hold mainly small companies, big Canadian ones, European stocks, bonds or is it what’s called a balanced fund with a mix of stocks, bonds and cash?
6. Next, is this fund distinct from anything else in your portfolio? You only need three or four funds tops for a well-rounded investment mix and you don’t want them stepping on each other’s toes with similar holdings. Duplication actually increases risk.
7. Finally, ask about risk or volatility. The adviser can show you a historical performance chart. If it has huge swings up and down, more so than a broad index like the S&P 500 or Canadian S&PTSX Composite, then you have a greater chance of making money but also losing it.
Ask these seven questions and you are on the road to becoming an informed investor.
– Alison Griffiths is a financial journalist, author and host of Maxed Out on the W Network. Write to her at alison@alisongriffiths.ca.
