Mutual Funds

[Guest jayhawker]

I've finally decided to open a Roth IRA, but now I come to the question of which mutual fund I want to start with. I intially want to go with a managed approach to my Roth, but will want to take a more personal and active approach once my time frees up and I gain more experience.

A little info about myself. I am 26, married and plan on only opening 1 account at this time. We qualify for the Roth, and plan on investing the cap each year. My wife is currently pregnant, and I plan on opening a 529 plan within the next month as well, with small intial investments by us and large investments from family and friends. I know that it is smart to be more aggresive now, and conservative later.

The fund that I've came across lately that interest me is the Fidelity Advisor New Insights (FNIAX) Fund. The only problem I've found is that I have to go directly through an individual broker or bank to invest into this fund. I'm wary of doing this because of the increased "fees." Before I found this fund, I was almost sure I was going to start my Roth through Fidelity (for now), but I am unsure now because I really do like this fund. If I was to go with Fidelity, I'll probably start initially with the Fidelity Contrafund, even though this seems to be getting to large.

So, basically my question is.....Should I seek an individual broker because of that one fund, or should I find a nice alternative and just start saving/investing.

On a side note, I don't believe that fees are a major problem. I'm more of the believer that if I have to pay more for a better fund in order to get higher returns, then I will.

Thanks for any help.

[John G]

My guess is that you have a reasonable level of technology savy, so why not use the internet to examine your choices. There are over 8,000 mutual funds and you need initially ONE.... well perhaps one for you and a different fund for your wife. (you will learn more watching two funds) There are easily hundreds if not thousands of funds that would work for you.

The universe of mutual funds is divided into NO LOAD (no up front or exit commissions) and loaded funds. Stick with the NO LOADS.

Given your ages, I would suggest that a broad based stock mutual fund would be a good choice. One route is to select an INDEX fund - these are computer driven funds that own all the stocks on a "list" such as the S&P 500. Advantages of an index fund are: easier to choose (less to evaluate), lower annual expenses, broad diversification of holdings and you get performance nearly identical to the benchmark list. Vanguard created the index strategy, but many fund families now offer index funds. Second route is a analyst driven mutual fund - like Contra at Fidelity, that focuses on one theory or investment strategy (growth, value, emerging markets, etc).

Using a broker vs do-it-yourself: I would argue for making your own choices. Why? First, you will learn more if you take charge. Second, its your money and you will have a higher level of interest than a broker looking at perhaps 2 x $4k. Third, a broker often will direct you to a fund that makes him/her more money, not neccessarily you. Fourth, it just does not take a huge amount of time to make a fund choice. You should be able to pick a mutual fund (or two) in a few hours one evening looking over some of the choices.

How to pick a mutual fund? Each year Consumer Reports reviews 100 funds that perform well in their March "tax" issue. That is one way to narrow the field! You can also use Morningstar ratings to find prospects. Avoid narrowly cast funds for your first choice. While past performance is not a great predictor of future performance, a reasonable track record over 10 years will probably give you some peace of mind. You are correct that very large funds often have difficulty maintaining top performance, so you might want to avoid the elephants like Magellan. Look for funds with below average annual expenses. You can't possibly select the perfect or best performing fund... make a reasonable choice and live with it for a few years.

Agressive? I sure hope you mean bias towards equities rather than playing mutual fund long shots. Time is you ally. Let compounding do its job. If you and your wife each put $5,000 into Roths every year for the next 40 years and obtain a 10% annual return...... your retirement assets will grow to about $4.4 million.

Go for it!