BetterInvesting interviews Danielle Schultz, a Chicago-area Certified Financial Planner who recently updated BetterInvesting’s Mutual Fund Handbook, now available as an ebook or PDF. We ask Danielle, a Lifetime Member of BetterInvesting, about mutual funds and related topics.
What trends are you seeing today in mutual fund investing?
Danielle: “Increasingly, mutual funds — and ETFs — are slicing and dicing into ever smaller asset classes that can be sold to the consumer as a ‘hot’ sector and which generate management fees and sometimes trading charges for the mutual fund company. If these do not attract sufficient interest, they’re folded into larger funds or simply eliminated, leaving the consumer high
Are investors better off with index funds or managed funds?
“Index funds perform better over the long term, resoundingly. All research on long-term investing confirms this. Also, index funds carry far lower management costs and are much easier to allocate into a properly diversified investment mix — you always know what’s in them.”
What do you think about the move away from mutual funds to exchange-traded funds?
“I don’t think consumers really understand ETFs yet. Advisers love them both for their lower costs and the ability to know at any given moment what price you are getting, as opposed to waiting until the end of the day for the surprise.”
Is there still a place in portfolios for bond funds, now that interest rates are so low?
“Yes, as part of a proper asset allocation/risk tolerance mix. Interest rates may be low, but with bond funds you need to look at total return — yield plus gains. Some bond funds with fairly low yield have nonetheless seen total return as much as 14 percent recently.”
Are real-estate investment trust funds safe for the long haul for a retirement account or are they too cyclical?
“Publicly traded REITs have generated excellent return over the past 10 years — 32 percent the last time I looked. For any investment, large return and large risk go hand in hand. REIT funds typically pay out a lot, also. They should only be held in retirement accounts (tax-sheltered) because of income-tax complexities. They’re the part of the portfolio I classify as “alternatives” and should be part of many portfolios — how much depends on the rest of the portfolio, how much guaranteed income the retiree has in addition to the portfolio, and therefore how risk tolerant the individual is. I never recommend that any single asset class make up more than 10 percent of the total portfolio, and sometimes much less.”
Target funds: Are they always on target for everyone?
“No. They’re usually good for starters, but not everyone of the same age or target retirement date has the same risk tolerance. Also, it’s harder to allocate them into asset classes if the person has a large portfolio of other investments.”
What’s the best way to diversify internationally?
“I like to divide between developed markets stocks, emerging markets stocks, and international bonds. Investors should know that these investments are more volatile than U.S. investments but also have more reward potential (at least historically). I don’t like global funds as much because it muddies the waters —they can be heavily invested in the U.S. or U.S. companies with significant overseas business. But how do you know at any given point if the active manager has made the optimum choice? Better to try to stick to more ‘pure’ asset classes if you’re building a portfolio to reflect the expected performances of indices.”
About the ‘Mutual Fund Handbook’
The Mutual Fund Handbook, originally written by Amy Buttell, is $15 for BetterInvesting members ($20 for nonmembers) via the BetterInvesting online store. To get your copy, click here. Or download a free sample chapter of the Mutual Fund Handbook and also try out BetterInvesting’s free mutual fund resources.
About Danielle Schultz
Learn more about Danielle Schultz and read her blog.
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