the fund investor’s toolbox

TheFundInvestor’sSchoolhouse™

The Fund Investor’s Toolbox

Useful Research, Selection & Portfolio Management Tools

Copyright © Richard Loth 2012

A Fund Investor’s ToolBoxTable of Contents

Introduction

Chapter 1 The “Textbook” for Mutual Fund Investing – Bogle on Mutual Funds: New Perspectives for the Intelligent Investor

Chapter 2 Morningstar – The “Swiss Army Knife” of Mutual Fund Investing Tools

Chapter 3 The American Association of Individual Investors (AAII) – A Worthwhile Membership Organization for Fund Investors

Chapter 4 BrightScope – Helping 401(k) Investors Evaluate Their Plans’ Effectiveness

Chapter 5 Vanguard and T. Rowe Price Websites – Useful Sources of Fund Investing Education

Chapter 6 The “Falcon’s Eye” – The Mutual Fund Observer’s Unique Fund Research Tool

Chapter 7 Common Sense – You Can’t See It or Feel It, But It’s a Great Investing Tool

Conclusion

A Fund Investor’s ToolBox

Introduction

Fund investors have dozens of tools to choose from to help them make smart mutual fund investment choices. Fund databases, websites, calculators, screening software, newsletters, videos, publications, message boards, and financial media are readily available.

It would be a daunting task to test the effectiveness of all of these resources. In an effort to simplify things for the average fund investor, the Fund Investor’s Schoolhouse has made a selection of tools that conforms to three criteria:

They must be easy to understand and have practical application to mutual • fund selection, monitoring, and portfolio construction and management.They must be readily accessible to the general investing public.• They must be affordable or, even better, free.•

As you can see from the table of contents, the Schoolhouse has identified seven mutual fund investing tools for the Fund Investor’s Toolbox. Some of these have been around for a number of years, while others are relatively new. In the following chapters, I’ll summarize the principal features of each and provide guidance as to how they can help investors invest wisely in mutual funds.

Chapter 1

The “Textbook” for Mutual Fund Investing – Bogle on Mutual Funds: New Perspectives for the Intelligent Investor

“This is the definitive book on mutual funds – comprehensive, insightful, and – most important – honest. Any investor who owns or is thinking of owning shares in a fund should read this book from cover to cover.”

The above endorsement, supplied by legendary investor, Warren Buffet, appears on the jacket cover of John C. Bogle’s seminal work on mutual fund investing. Typical of Buffet’s concise, and most often accurate, investment guidance remarks, these few words really do sum up all that needs to be said about Bogle on Mutual Funds. Originally published in 1994, what the book has to say to fund investors is timeless, and a must-have investing “tool.” That’s why I have given the book “textbook” status when it comes to learning the fundamentals of mutual fund investing.

Bogle graduated magna cum laude with a degree in economics from Princeton University in 1951. He studied mutual funds in depth during his university days, which culminated in his senior-year economics thesis that laid the conceptual groundwork for the index mutual fund. He founded Vanguard in 1974, becoming its CEO and chairman before retiring in 1999. He has written and lectured extensively on the firm’s principles of putting the interests of the investor first and constructively criticizing the fund industry for practices that run counter to low-cost, client-oriented mutual fund investing.

The book’s fourteen chapters and epilogue (see below) are a relatively easy read; Bogle’s writing style is lively and reflects his role as, what many investment professionals consider him to be, “the conscience” of the mutual fund industry. One of the extremely useful content features of the book is Bogle’s use of “caveat emptor” boxes. Scattered throughout the book, Bogle uses this writing technique to provide the average investor with brief, targeted words of wisdom on the subject matter of a given chapter. These alone are definitely worth reading. The following is an example from his chapter on index funds:

CAVEAT EMPTOR: No Room at the Top

Indexing precludes the opportunity of owning a top mutual fund with the very best performance. Based on the record of past decades, and ignoring the effect of fund sales charges, two out of five equity mutual funds should outperform the total stock market index over time. However, in any given year it has been extraordinary for the index fund to outperform fewer than 40% of equity funds. That the odds of picking the winners are obviously poor need not preclude you from making the bet. But you should carefully decide whether to seek mainstream stock funds, which may provide marginal superiority with relatively comparable risk, or more aggressive funds seeking greater superiority and incurring substantially greater risk in the process. As noted in Chapter 4 [How to Select a Common Stock Mutual Fund], if you want the fund that you own to rank among the top 10% of all stock funds, you should be prepared for it to rank among the bottom 10%.

Here’s the table of contents for Bogle on Mutual Funds:

Chapter One: The Rewards of Investing Chapter Two: The Risks of Investing Chapter Three: Mutual Funds: Principles, Practicalities, Performance Chapter Four: How to Select a Common Stock Mutual Fund Chapter Five: How to Select a Bond Mutual Fund Chapter Six: How to Select a Money Market Fund Chapter Seven: How to Select a Balanced Mutual Fund Chapter Eight: Where to Get Mutual Fund Information Chapter Nine: Index Funds Chapter Ten: Mutual Fund Costs Chapter Eleven: Taxes and Mutual Funds Chapter Twelve: The Allocation of Investment Assets

Chapter Thirteen: Mutual Fund Model Portfolios Chapter Fourteen: A Mandate for Fund Shareholders Epilogue: Twelve Pillars of Wisdom

The book’s Preface provides a clear indication of what Bogle hopes readers will learn from his fund investing experience and expertise. He says, the book “… does not attempt to tell you how to attain wealth without risk, nor does it attempt to tell you how to select the next ‘number one’ equity fund. Both of these tasks are, in a word, impossible …” Instead, he suggests that investors establish a long-term investment program that must take into account:

“… (1) your investment attitudes, whether conservative or venturesome; (2) your position in the life cycle of investing, as you move from the accumulation of assets during your earning years to the enjoyment of income during your retirement years; and (3) the behavior of the securities markets over the long run, from which much (but not too much) should be learned.”

The Bogle on Mutual Funds book is readily available from a variety of sources. Public libraries and most large bookstores will most likely have copies on their shelves. Since Bogle’s insights are so highly valued by the investing public, I would encourage readers to have a copy of their own for ready reference on the home front.

As of this writing, Amazon.com has a plentiful supply of both new and used copies. In the case of the latter, this treasure of mutual fund investing know-how can be had for as little as one cent ($0.01). In that case, I’m going to break the rule about there not being any guarantees in the investing universe. At that cost, I’ll guarantee a substantial “educational return” on your investment – one of the best you can make!

Chapter 2

Morningstar – The “Swiss Army Knife” of Mutual Fund Investing Tools

BackgroundChicago-based Morningstar, Inc. is widely recognized as one of the premier independent investment research firms in the financial sector. In particular, the firm is highly regarded for the quality, scope, and the breadth and depth of its mutual fund investing information, analysis, and guidance.

Victorinox, the Swiss manufacturer of the iconic Swiss army knife, has a model called the “Deluxe Tinker,” which has 17 functions, i.e., useful tools that are packaged into one appliance. In similar fashion, Morningstar’s “Funds” tab on its website (www.morningstar.com) provides access, by my count, to more than 20 assorted mutual fund investing tools. For fund investors, Morningstar’s website content, publications, videos, training courses, special services, and subscriptions are truly phenomenal

resources. However, for many investors, particularly the less-experienced, the enormity of this material can be a bit overwhelming.

Therefore, I’m going to take an about-face on the magnitude issue and attempt to make a “mole hill” out of a “mountain.” The objective is to keep things simple. Over time, as you become more familiar with Morningstar’s abundant fund investing resources, you can expand your research efforts accordingly. For purposes of the Schoolhouse’s tool box, I’m going to focus the reader’s attention on just four highly useful Morningstar mutual fund investing tools and how to access them:

One-Page Fund Report [website] • Analyst Gold-Rated Funds and Categories [website]• FundInvestor Newsletter [subscription]• Fund Investing Articles [website]•

How to access these tools

Before describing each of these items, here’s an overview of the accessibility to Morningstar’s fund investing research tools. Morningstar does makes some of them available free of charge and others require payment. As of this writing, the single-page fund report, fund analysis, and the listings for the analyst gold-rated funds and categories data require a Premium Membership (annual $189). The FundInvestor Newsletter is available by quarterly ($39.95) and annual ($119) subscriptions. Morningstar’s extensive online mutual fund articles are available without charge.

While the cost-benefit ratio for the paid items is highly favorable to the user, you might really “strike it rich” by checking with your local library. Many public libraries have Morningstar Premium Memberships in their names. These facilities permit library members to use all of Morningstar’s resources, included the ones just described, free of charge. Your library card number thus becomes an extremely valuable online mutual fund research tool that you can use from the comfort of your own home – definitely worth checking out. Also, in Chapter 6 – The “Falcon’s Eye” – The Mutual Fund Observer’s Unique Fund Research Tool – explains how to access Morningstar’s fund reports free of charge.

Directions for Accessing a Fund Report

Step 1: At the very top of the www.morningstar.com home page, there’s a blank box with the word Quote next to it. Enter a fund’s ticker symbol and click on Quote.

Step 2: On your screen, you’ll have what I call the fund report’s online home page, which contains, in several different sections, Morningstar’s comprehensive quantitative and qualitative fund information. In the first line of horizontal

data, you’ll click on a data point captioned as “PDF Report,” which will bring up Morningstar’s one-page fund report.

Step 3: Click on the printer icon and you’ll have a hard copy of a

One-Page Fund Report, Morningstar’s flagship mutual fund product. It is a must-use research tool for fund investors.

It is not an exaggeration to say that this data-packed document contains virtually all the information an investor needs to make an informed mutual fund selection and/or monitor a fund portfolio. The Morningstar’s One-Page Wonder e-booklet found in the Schoolhouse’s Library will explain in detail how best to use this valuable fund analysis tool.

Directions for Accessing the Listings for Analyst Gold-Rated Funds and Categories

Step 1: For data on Analyst Gold-Rated Funds and Categories, start with Morningstar’s home page and click on the Funds tab in the horizontal navigation bar at the top of the page. On the screen, you’ll see the various components of this mutual fund section.

Step 2: Put your cursor on the Analyst Ratings caption to get access to the listings, individually and by category, for Morningstar’s most highly rated mutual funds, which, as of this writing, number 180. Morningstar’s investment research is not infallible, however the breadth and depth of its analyses in the mutual fund field is unmatched by any other research service.

Readers should note that the fund profiles found in the FIS’s Classroom in the fourth week of every month come from this elite pool of “best-in-show” mutual funds.

Directions for Accessing the FundInvestor Newsletter

Morningstar’s monthly FundInvestor Newsletter draws on the firm’s large corps of fund analysts and equity/bond analysts to provide fund investors with current analytical data on 500 of the most widely used mutual funds. Fund strategies, market issues, performance are scrutinized and commented on and recommendations provided on an on-going basis. Several years of archived editions are available. This publication is available both in print and online. Go to Morningstar’s home page and click on the Membership tab in the navigation bar. On that screen, click on the Newsletter caption and then scroll down to the presentation under FundInvestor Strategy for subscription details.

Directions for Accessing Fund Investing Articles

Morningstar’s huge current and archived Fund Investing Articles are a unique source of mutual fund analysis, education, and guidance that covers several years. The value of the professional insights provided in this material is significant.

Step 1: On Morningstar’s home page, click on the Funds tab in the site’s navigational bar.

Step 2: The current offerings are found in the Funds section, which carries a continuous stream of updated and new articles on a wide variety of mutual fund investing topics. Historical perspectives can be gleaned by clicking on the entry for “Articles and Analyst Reports” where you’ll find an indicator for Fund Article Archive.

While I consider all the tools in the Schoolhouse Toolbox as useful for fund investors, there’s little doubt that the contributions from Morningstar are of major importance. Mutual fund investors should make the tools we have just discussed, as well as Morningstar’s other offerings of this nature, an essential part of their fund investing decision making process.

Chapter 3

The AAII – A Worthwhile Membership Organization for Fund Investors

BackgroundThe Chicago-based American Association of Individual Investors (AAII) was founded by James Cloonan, Ph.D., in 1978 as a non-profit membership organization dedicated to helping individuals become effective investors through education, information, and research. The AAII’s current membership includes over 150,000 stock, bond, mutual fund, and exchange-traded fund investors.

I’ve been a member of the AAII since the mid-1980s and highly recommend its services and publications, which are very beneficial for both the beginning and experienced investor. Additional information is available by calling AAII’s toll free member services number at (800) 428-2244 and/or going to its website – www.aaii.com.

How to access the tools

It only costs an affordable $29 annually to be a member of the AAII. You’ll then have complete access to the organization’s website, where, as I’ll explain below, you’ll

find three mutual fund investing apps – the AAII’s monthly magazine, an AAII annual guide to mutual funds, and an AAII model mutual fund portfolio – that come with an AAII membership.

How to use the tools

The American Association of Individual Investor’s monthly publication, The AAII Journal, provides you with a continuing stream of information and high quality insights that focus on how you can improve your investment results. The Journal’s editorial content regularly includes guidance related to mutual fund investing.

There is “Topic Archive,” on the AAII Journal page on the aaii.com website that includes a section for mutual fund articles that go back several years. This body of investing guidance covers a wide range of subject matter appropriate for all levels of fund investor experience and expertise.

The AAII’s special report on five-year mutual fund data is published each year in February. It is available in printed form as a special edition of the AAII Journal under the title, The Individual Investor’s Guide to the Top Mutual Funds. The 2012 edition covered more than 730 funds. The online version, Mutual Fund Guide, contains more than 1,520 funds.

Both presentations use the same data points to analyze the funds they cover. These include fund style, 5-year and total annual return percentages, bull and bear market fund performance and category returns, 3-5-10 year average returns for funds and their categories, yield percentages, tax cost ratio, risk index, total fund assets, fund portfolio composition, foreign holdings percentage, number of securities and top 10 holdings, fund expense ratio, maximum load percentage, and 12b-1 fees. The individual funds are listed under fund categories and these have averages for the data points just listed.

As can be seen, the fund data is comprehensive. Both the printed form and the online versions convey the same information. And, both include how-to-use guides and an explanation of key terms and statistics. Nevertheless, because of the large spreadsheet format, I found it easier to work with the printed version than the online version. The former allows the reader to have a complete “wide-screen” view, which is easier to read. These guides are a very valuable tool to monitor fund investment qualities, or lack thereof, on a year-to-year basis.

Lastly, at the bottom of the AAII’s website home page, under the Most Popular Resources caption, you can click on the Model Portfolios tab, which will take you to the AAII’s Model Mutual Fund Portfolio. This portfolio and the others for stocks and ETFs have been created by James Cloonan, AAII’s founder and Chairman.

As stated by him, the mutual fund portfolio “… is a model [using real-world circumstances] and not intended as a complete advisory service. The emphasis will

be on consistency, risk control, and the selection of funds that follow approaches that an individual investor, rather than an institution, should follow.” He clearly indicates that the funds selected are based on his opinion.

What should be of interest to serious fund investors are four accompanying educational resources that are linked directly to the model mutual fund portfolio: Portfolio User’s Guide, Model Fund Selection Rules, Portfolio FAQ, and Fund Cap Size and Style Definitions.

Chapter 4

BrightScope – Helping 401(k) Investors Evaluate Their Plans’ Effectiveness

BackgroundSan Diego-based BrightScope, Inc., figuratively speaking, may be one of the smallest tools in the Fund Investor’s Toolbox, but for participants (fund investors) in 401(k)-style retirement plans it can play a very important role. BrightScope is the leading provider of independent research for quality ratings of retirement plans. I feel confident in describing the firm’s preeminent position as an evaluator of 401(k)-style plans as comparable to Morningstar’s preeminent role as an evaluator of mutual funds.

Participants in company-sponsored plans will find BrightScope’s analytical reports on the quality of their employer-sponsored 401(k)s extremely valuable. If a plan’s rating is sub-standard, pressure needs to be applied on the plan-administrator to take corrective action to improve the company’s 401(k) to the highest possible standards.

How to Access the Tools

In 2009, BrightScope launched its user friendly website (www.brightscope.com) whereby fund investors, as plan-participants, can freely obtain a compact quality rating report on nearly 50,000 401(k) plans, covering some 30 million workers. BrightScope looks at 200 individual data points (see below) to arrive at a rating, which is expressed as a numerical score ranging from 1 to 100 (low to high), and then compared to other plans’ scores.

The home page of BrightScope’s website has a display that looks like this:

Retirement Plan Search

Find and research the quality of your 401k or 403b retirement plan.

e.g. Google Inc. Search

BrightScope 401k Ratings Directory

How to Use the Tool

Using Google as an example of a company you want to research for the quality of its 401(k) plan, you simply enter the company name in the box provided. You’ll then see BrightScope’s Rating, which is expressed as an easy-to-view, comparative graphic. In this case, it’s evident that Google (87) employees enjoy a very high quality 401(k) plan:

Lowest Rating Average Rating BrightScope Highest Rating In Peer Group in Peer Group Rating in Peer Group

42 72 87 90

The rating data points referred to above are grouped into five broad analytical areas:

Total Plan Cost• – The sum of all investment and administrative costs incurred to operate the plan.

Company Generosity• – The Plan’s vesting schedule, eligibility periods, and all contributions to the plan by the company for the sole benefit of the participants.

Participation Rate• – Percentage of eligible participants who have account balances in the plan.

Salary Deferrals• – The average salary deferral per eligible participant in the plan.

Account Balances• – The average account balance per eligible participant in the plan.

BrightScope obtains its data directly from plan sponsors and record keepers, and augments these primary sources with data from the Department of Labor and the Securities & Exchange Commission. By analyzing and interpreting this data, it provides unprecedented transparency into the 401k industry. Fund investors, as 401k retirement plan-participants, can use a BrightScope Plan Rating to determine the investment qualities, or lack thereof, of the vehicle they are using to channel their retirement savings.

Chapter 5

Vanguard and T. Rowe Price Websites – Useful Sources of Fund Investing Education

BackgroundMost of the general public will recognize Vanguard and T. Rowe Price as highly respected, prominent fund companies, which have a large base of individual investors as shareholders in their fund offerings. My reason for singling them out is not intended in any way to be an investment recommendation or endorsement. It is simply a matter of record that both of these purveyors of mutual funds have solid reputations for providing quality investment education to their customers. And, what is particularly admirable, the majority of their educational guides, publications, commentaries, and articles are available, with no strings attached, to non-customers.

Both Vanguard and T. Rowe Price have investment educational components on their websites that qualify as meaningful fund investing tools, which, therefore, I am including in the Fund Investor’s Toolbox.

VANGUARD – www.vanguard.com

Once you are on Vanguard’s home page, click on the highlighted phrase, “Go to the Personal Investors site ›››.” The next step is to click on the “Insights” caption in the navigation bar on this screen, which provides an overview of the contents of the Vanguard website. You will readily see that the Insights page contains a fair amount of impartial, objective mutual fund investing guidance, and avoids pushing Vanguard products.

I recommend focusing on the following items by clicking on the “MORE” caption after each section title to access specific information and/or guidance that is of interest to you:

Markets & Economy Insights • – Big-picture articles, both current and archived, on mutual fund issues are listed. The “Guide to Major Economic Reports” is a plain-English glossary-like explanation of the economic lingo tossed around by the financial media. In addition, as the caption indicates, the “Economic Week in Review” is a weekly look at salient elements of the U.S. and world economies.

Retirement Insights• – In this section, articles, guides, and tools are used to provide retirement investing guidance related to three distinct stages: getting started, nearing retirement, and managing assets in retirement.

Saving & Investing Insights• – This section provides more retirement investing information, but there is one feature that is particularly worthwhile checking out. You will see a caption for a guide titled, “Learn About Index

Investing.” This package of commentaries, webcasts, videos, and articles provides a valuable, comprehensive tutorial on index fund investing.

Investing Truths• – The four commentaries, taken as a whole, about investing risk, costs, emotion, and time comprise a must-read tutorial on the fundamentals for making smart investment decisions.

Vanguard has a well-deserved reputation for working hard at aligning its interests with those of its fund investors. Its corporate culture is built around this principle. However, as I’ve indicated herein, you don’t have to be a customer of Vanguard to take advantage of its investing education platform. To the firm’s credit, its objective guidance in this instance is available to all serious investors.

T. ROWE PRICE – www.troweprice.com

Founded in 1937, T. Rowe Price is a publicly owned (NASDAQ:TROW) investment company with headquarters in Baltimore, Maryland. In similar fashion to Vanguard, it gets a high stewardship rating with the investing public. And, accordingly, has, over the years, developed meaningful investment education and guidance resources, which it freely provides to customers and non-customers alike through its website.

If you put your cursor on the “Individuals” block of TRP’s mission statement on its home page, you’ll get a screen with a caption for “Individual Investors.” Click on this caption, which takes you to a screen with a tab for “Planning and Research” and a menu of ten items of interest to individual investors. I am including the following three as education and guidance tools in the Schoolhouse’s Fund Investor’s Toolbox:

Investing 101• T. Rowe Price Insights• Tools & Resources•

Once in Investing 101, Investing Basics will introduce you to guidance about investing and building and managing a portfolio. The General Information section is a broad tutorial on topics such as the kinds of investments individual investors should consider and how inflation impacts each one. The section for Taking Your First Steps is a boot camp for learning five fundamentals for investing wisely. TRP says you “… have to make the choice to start from scratch to learn something new. Investing is no different. Once you learn the basic concepts, rules, and principles of investing, the details of the process will become second nature.” The Manage Your Portfolio section is well done and covers risk and reward, diversification, and investment monitoring considerations. The aforementioned topics are the best of the Investing 101 page.

The T. Rowe Price Insights component in the Planning & Research menu provides in-depth commentary and analysis by TRP staffers and fund managers on a variety of

topics including, among others, market trends, economic developments, investing strategies, and personal finance. Also, at the end of this section you will find links to download (no charge) two highly regarded TRP publications – the T. Rowe Price Investor and the T. Rowe Price Report. The former is a monthly magazine for individual investors that recently won the Mutual Fund Education Alliance’s (MFEA) 2011 award for the “Best Shareholder Magazine.” The 24-page Report provides quality research on a quarterly basis on financial topics of interest to all levels of individual and professional investors.

The last item of interest in the Planning & Research menu is Tools & Resources. Click on the “Investment” display on the T & R page and you’ll get a long list customized tools, guides, services, and videos to help meet the needs of individual investors in general and fund investors in particular. Of all these items, many of which are available from a variety of sources, I suggest you scroll down to the bottom of this screen to the “Insight Reports” heading. Of the four listed guides, I can recommend two on topics that are relatively under-reported in mutual fund literature – Fundamentals of Fixed-Income Investing and Basics of Tax-Free Investing.

The Vanguard and T. Rowe websites contain a wealth of mutual fund investing education and guidance, particularly for the beginning investor. The information and guidance tools that I’ve highlighted in this chapter are reliable and have the added benefit of being authored by respected practioners in the investment industry.

Chapter 6

The “Falcon’s Eye” – The Mutual Fund Observer’s Unique Fund Research Tool

BackgroundIn 1996, Roy Weitz founded a non-commercial website called FundAlarm.com, which, over the next 15 years, was dedicated to helping individual investors decide when to sell a mutual fund. FundAlarm was well-known for its commentaries and database of “alarming” funds, as well as its lively discussion board. Weitz retired and closed the website in April 2011. However, David Snowball, a college professor who served as a senior analyst at FundAlarm, decided to launch the Mutual Fund Observer (www.mutualfundobserver.com) in May 2011 in order to “… carry on FundAlarm’s mission of education and service to fund investors.”

Among other features on the MFO website that may be of interest to the fund investing public, there is a tool that I believe is unique to mutual fund research. For reasons that will be obvious, this tool, which professor Snowball has named the “Falcon’s Eye,” lets you look at ten sources of individual mutual fund data with a click of your mouse. And it’s all free. From a cost-benefit perspective, this tool definitely belongs in the Fund Investor’s Toolbox.

How to Access the Falcon’s Eye

Step 1: On the Mutual Fund Observer’s home page, you’ll find a Resources tab in the navigation bar. Put your cursor on this tab and click on the Falcon’s Eye entry in the drop-down menu.

Step 2: You now have a screen that allows you to enter a fund’s ticker symbol. Start your search with the Submit button.

Step 3: Next, is the screen captioned, “Falcon’s Eye View,” wherein your fund’s ticker symbol will appear below those investment research sources that provide a report on the fund you’ve indicated. With this service, the Mutual Fund Observer provides you with links to the following purveyors of such reports:

Yahoo! Google Morningstar SmartMoney Bloomberg USA Today USNews Barron’s MFO MSN.Money

How to Use Falcon’s Eye

If you are familiar with these names, you know that the breadth and depth of their fund report data varies. With the exception of Morningstar, most of the fund data is quantitative. However, you may find some formats more useful and to your liking than others. What I think you’ll find interesting is comparing the content of each one of these sources. It shouldn’t come as surprise that Morningstar’s comprehensive approach comes out way ahead of all the others. Of course, you already know this from what I’ve told you about Morningstar’s “one-page wonder” in Chapter 2 and the Schoolhouse’s e-booklet on the same subject.

With regard to the accessibility of Morningstar’s single-page fund reports, readers should take note that this Mutual Fund Observer tool provides yet another way to easily obtain these valuable reports from the comfort of wherever you happen to be with your computer.

Chapter 7

Common Sense – You Can’t See It or Feel It, But It’s a Great Investing Tool

BackgroundFor many individuals, the investing process is a bit of a mystery, and they are intimidated by it. The identification, selection, and monitoring of good quality

investment choices are viewed as difficult, complicated tasks. Of course, the Wall Street crowd, with some exceptions, does little to dissuade them of this view so as to reinforce its reputation as the knowledgeable experts in this business.

No one would argue that to be a direct investor in stocks, bonds, and other securities takes expertise, experience, and time. As a rule, this combination of investing elements is lacking in the general investing public. In contrast, investing in mutual funds is not rocket science. It is within the reach of most individuals. However, there are certain principles and basic fundamentals that must be learned and practiced to be a successful fund investor.

Appropriate guidance from an investment professional or a meaningful level of investment self-education can provide an adequate foundation for informed fund investing decisions. Add a solid dose of common sense to this formula and the elements for success are greatly enhanced. Playwright and essayist, George Bernard Shaw, said that “Common sense is instinct. Enough of it is genius.” A dictionary definition of common sense reads like this, “… sound and prudent judgment on a simple perception of the situation or facts.” Accordingly, I’ve put together a list of commonsensical items and their mutual fund investing counterparts that I believe fit nicely into the Fund Investor’s Toolbox:

“A penny saved is a penny earned.”Mutual fund investors need to be cost conscious. Every penny saved by not having to absorb (1) a sales-charge, (2) higher than average fund operating expenses, and (3) excessive portfolio transaction fees all add to a fund investor’s return. And, it is matter of record that low-cost funds, over the long-term, outperform higher-cost funds.

“Don’t touch a hot stove.”Fund advertising and financial media often emphasize what’s “hot,” i.e., high-octane performers that are portrayed as “must buys.” These usually involve individual funds or particular market segments. They are promoted as new, and, by implication, better, approaches than the more traditional fund investing options. Just remember that if it’s “hot,” you may get “burned,” which means you’ll stand to lose money. Most likely, you’ll be better off sticking with the steady-Eddie-type funds.

“To err is human.”When it comes to investing, not losing money is generally considered to be an important principle. Minimizing mistakes, both their frequency and magnitude, is as helpful to building an investment nest egg as maximizing your winning picks. However, investing means taking risk, and losses, both realized and unrealized, are hard to avoid. The goal is to manage investment risk and keep losses within an acceptable range. It’s also true that failure is success, if you learn from it.

“Haste makes waste.”If, as a fund investor, you have been introduced to an opportunity to invest in a given fund, industry sector, or market segment that is accompanied by a pitch to “act now,” activate your brain’s caution button. Speculators and day-traders can’t wait for events to unfold. But, as a long-term investor you need to be “reflective” rather than “reactive.” Take your time and make an analytical, left-brain sided decision as opposed to reacting with a quick response based more on emotion than on investment fundamentals. Homework trumps guesswork in the investing process.

“Ignorance is bliss.”Living in a world in which we are constantly bombarded with an avalanche of news and information that is impossible to process, hitting the “off-switch” is tempting. However, when it comes to investing, “not knowing” is not an option; it’s a recipe for disaster. What is acceptable is tuning out what the investment community refers to as “market noise,” the cacophony of financial talk shows, the so-called “breaking news,” which, these days, seems to cover all the news, and the dozens of talking-heads on TV’s business channels. With mutual funds, use some or all of the other tools in the Schoolhouse’s Toolbox to understand their fundamental investment qualities. Whether you’re a do-it-yourselfer or use an investment professional, knowing what you own and why you own it is just smart investing practice.

“Consider the source.”Whether it’s investment information, guidance, or advice be sure that what you’re reading or listening to is unbiased, conflict-of-interest-free, and well-researched. For example, a financial column about the attractive investment opportunities in so-called emerging markets that only quotes from the portfolio managers of those types of mutual funds is only providing one side of the story. It would be the same as asking a fox about security measures for a hen house. Be aware that many of today’s ubiquitous “contributing writers,” whose opinions regularly appear on a host of financial websites, have questionable authoritative credentials. Whatever the source, a healthy bit of constructive skepticism would not be out of order.

In summary, just because your fund investing know-how is limited, do not be afraid to ask questions and be persistent in getting answers to those questions. In many cases, you’ll find that common sense questions and answers will be a useful tool in your fund investing endeavors.

Conclusion

The seven tools, and their subsets, that I have included in the Fund Investor’s Toolbox can make a difference in making informed mutual fund decisions. While I suggest that you “test drive” all of them, this does not imply that you should use all seven in your fund investing activities. The idea is to develop a familiarity with them, then, as a consequence of your review, you can decide which one, or ones, best serve your purposes.

the fund investor’s toolbox

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