The Optometrist’s Guide to Investing 101
Chapter 4: How to Quickly Assess a Mutual or Index Fund
5 Steps To Assess a Mutual or Index Fund:
You are probably looking at your 401K list of mutual fund choices and getting confused with all the numbers. We are going to teach you how to quickly evaluate a mutual fund in less than 60 seconds with a few simple steps:
(1) Find all the funds that are similar to your asset allocation:
I know we have been using Vanguard as our prime example, but many other big brokerage firms like Fidelity will have similar funds with similar names. It is quite common for all 401K plans to have mutual funds like a total stock market index fund, so you need to find something similar.
Example: Fidelity Total Stock Market Index Fund (FSKAX) compared to Vanguard Total Stock Market Index Fund (VTSMX). Both are exactly the same and will have similar cost and return.
(2) Enter the Fund’s Ticker symbol:
We recommend Yahoo Finance. This will allow us to see what type of assets the fund actually invests in, such as Stock vs Bond, Large vs Small cap companies or Foreign vs Domestic bonds/stocks, etc
Example: Vanguard Mid-Cap Index fund with the ticker symbol VO has the majority of its holding in mid-cap US stock.
(3) Select NO-LOAD funds only:
Make sure that there is no additional fee charged (sometime up to 5%) required for you to buy the fund. Usually this fee can be charged prior to purchase (FRONT-Loaded) or after a certain time (BACK-loaded). If you look at the “load option” on any mutual fund on Yahoo Finance. the no-load fund will show "NONE".
(4) Look for the lowest Expense-Ratio (“cost of fund”):
This is probably the most important factor when picking a fund and will cost significant earnings in the long run if too high. Most low-cost, passive index funds will be significantly less than 0.20% (or expense ratio of 20) but many are even as low as 0.05%.
Avoid actively managed mutual funds, since these can have a much higher expense ratio. If you have no other choices on your 401K list, the most cost we would accept is less than 1%.
(5) Past Performance of Earnings:
While past performance does NOT indicate future performance of the funds, it does offer us some insight in the pattern of the fund itself. Just take a look at its performance after the 1st, 3rd and 10th year to get a sense of its average gains for the short-term and long-term.
Example: As of 2018, the Vanguard Total Stock Market Index (VTI) has a performance of 1 year= 21.05%, 3 years=10.96% and 10 years= 8.60%.
Don’t get too excited with the 21.05% performance gain because it is definitely not the norm - 2017 was a really great year! An average return of 8.60% (over a course of 10 years) is a more realistic return long-term during an investor’s lifetime.
You can definitely dive into the complicated details of each fund as you build your investing knowledge, but this basic knowledge is more than enough to quickly evaluate the fund.
Financial Pearl
"While past performance does NOT indicate future performance of the funds, it does offer us some insight in the pattern of the fund itself"
Example: How to Analyze a Fund + Compare Good vs Bad
Now let's compare two stocks that are very similar in asset since both track the Total Stock Market but we will see how fees and hidden cost can make one an awful investment choice for a fund!
Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
Example: Let say within your 401K, you see Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) and want to know more about this. Using Yahoo Finance.com, you can put the VTSMX ticker in the search bar.
Summary:
- ✅ Current Price per Share = $61 per share (Doesn’t matter)
- ✅ Expense Ratio (Cost of Fund)= 0.14% yearly. This is cheap but could be cheaper compared to most index funds at 0.03%
Profile:
- ✅ Investment Valuation Box: You can see that this fund mainly invests in “Blended-Large Size Companies”. Which makes sense because even though it mirrors every single company in the USA, its allocation is weighed based on company market cap size, so the largest companies will have a majority of the overall index.
- Note: Blended means that it is a mixture of growth-type (Companies whose stock is anticipated to grow at rate significantly above the average of the Market such as Amazon, which isn't very profitable, but has much room for growth) and value-type (Companies whose stock price are cheap in relation to their earning, such as JPMorgan Chase Bank that is pretty stable)
- Note: Blended means that it is a mixture of growth-type (Companies whose stock is anticipated to grow at rate significantly above the average of the Market such as Amazon, which isn't very profitable, but has much room for growth) and value-type (Companies whose stock price are cheap in relation to their earning, such as JPMorgan Chase Bank that is pretty stable)
- ✅ Fee & Expenses: Check to see if there is Front or Back Sales Load (which is none)
Performance:
- ✅ Year to Date (YTD) for 2022: -24.75%
-
✅ 5 year: 36.89%
-
✅ 10 years: 12.35%
Overall impression:
- This is a pretty great and affordable index fund with a great average high return! Vanguard is known for low cost and great performance.
Invesco Oppenheimer Main Street Fund Class A (MSIGX)
Example: Let's analyze another similar class of Total Stock Fund in another doctor’s 401K - however this one is just awful. Invesco Oppenheimer Main Street Fund Class A (MSIGX) Using Yahoo Finance, you can put the MSIGX ticker in the search bar.
Summary:
- ✅ Current Price per Share = $37 per share (Doesn't matter)
- ✅ Expense Ratio (Cost of Fund)= 0.85% yearly. This is not cheap at all compared to its peers
Profile:
- ✅ Investment Valuation Box: You can see that it mainly invests in “Blended-Large Size Companies”. Similar to our previous Vanguard Total Stock Market Index
- ✅ Fee & Expenses:
- Front Sales Load= 5.50%. This is a big NO. It basically means that if you invest $1000 in the fund, they will charge $55 to buy the fund.
Performance:
- ✅ Year to Date (YTD) for 2022: -26.06%
-
✅ 5 year: 24.17%
✅ 10 years: 11.53%
Overall Impression:
- This is a pretty awful fund due to the fact that it is an actively managed fund (not passive index), its expense ratio fee is ridiculously high and it has the nerve to charge us an initial fee of 5.5% to even buy the fund. Avoid at all costs! Hence, why despite tracking the same stock index, after fees, it underperform the Vanguard index fund.
-
Vanguard Total Stock Market Index (VTSMX)
-
Expense Ratio Cost= 0.14%
-
Investment Valuation= Large Blend
-
Front or Back Load Fee= None
-
10 year Return= 12.25%
-
Invesco Oppenheimer Main Street (MSIGX)
-
Expense Ratio Cost= 0.85%
-
Investment Valuation= Large Blend
-
Front or Back Load Fee= 5.5%
-
10 year Return= 11.53%