Wednesday, June 3, 2015

Simple 'Rules of the Road' to Be Followed When Considering Investment and Other Financial Advice

There are three fundamental 'rules of the road' which individual investors should follow when investing in stocks, bonds, and other asset classes.

These rules of thumb should also be adhered to when considering such things as student loans, credit cards, car loans, home mortgages and home equity loans.

It's the simple adoption of the MOM (My Own Money) principle and practice of personal financial management.

We'll begin our journey today with financial assets and three keys to properly selecting investment advisers when choosing mutual funds. Picking Active Funds: Look Beyond Performance contains useful advice for long term investors:

"Stock pickers might be making a comeback, or at least their performance so far this year suggests so. But figuring out how to choose the best fund to put your money in may not be as easy as picking the best performer.

Here are three measures to apply in evaluating an actively managed stock fund:

The cost

Index funds are on average cheaper than actively managed funds. The average U.S. stock index fund has an expense ratio of 0.73%, compared with 1.24% for stock funds that are actively managed, according to researcher Morningstar.

But some actively managed stock funds are much cheaper than others—and lower costs generally put investors in a stronger position to log higher total returns. Indexing giant Vanguard Group is one company known for low fees on actively managed funds, but historically active managers like Fidelity Investments also offer low-fee products.

Is the manager really active?

The last thing you want to do is end up with a so-called “closet indexer,” a fund manager that charges a higher fee than an index fund but is essentially running one anyway. “You can’t beat the index unless you differentiate yourself,” says Morningstar analyst Alec Lucas.

Some in the industry use a measure called “active share,” which looks at the extent to which the holdings in an actively managed portfolio differ from those of a benchmark index. But keep in mind that being different from an index is no guarantee of market-beating results: The manager might choose stocks that perform worse.

Skin in the game

An important but sometimes overlooked metric is how much a fund manager has invested in his or her own fund. The Securities and Exchange Commission requires fund managers to disclose how much they hold in a fund, but not very frequently and only in a dollar range.

That ownership information can still be useful though. In a recent study, Morningstar found that funds in which managers invested nothing had the lowest success rate, while those funds whose managers had more than $1 million invested had the highest. (The information is in the fund’s Statement of Additional Information, often available on the fund company’s website.)

“If it’s your own money, there’s more incentive to pay that much more attention” to performance, Mr. Lucas says."

Summing Up

Don't pay for what you don't get. In the mud of the marketplace, it's best to follow the caveat emptor way each day and all day --- aka 'Let the buyer beware.'

And try hard not to trust and not to do business with someone who is primarily interested in getting his hands on as much money of yours as he can.

Understand the long term relationship of ongoing costs incurred to eventual rewards realized.

And know that money not spent on the non-expert 'experts' is available to you and can be invested the MOM way for the long haul.

Finally, and early in life, get to know and internalize the rule of 72. The effect of compounding is real and it's huge.

The rule of 72 applies to reading and writing, financial knowledge, debt management, asset accumulation, cost control and a life well lived.

That's my take.

Thanks. Bob.

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