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Monday, July 9, 2012

Do You Know What's in That Fund?

Here is a really excellent piece--Hey, What Do You Think Of My Investment?--I recently came across that describes where an advisor was asked what he thought about a particular fund.  I empathized because I run into this all the time.  Asking an advisor what he thinks about a particular fund puts him or her in a difficult spot without knowing the overall goals and structure of an individual's investment program.  It's like asking about a team's draft choice if you don't know the structure of the overall team.

Still, he analyzed the fund's performance and structure.  Performance was a bit erratic - having performed well several years ago but under by quite a bit over the past 3 years.  But this is seen a lot:  advisors and individuals pick the best-performing funds but then the funds don't live up to their past performance.

What I found interesting about the piece, and what should give pause to those who invest in funds via their 401(k)s, 403 (b)s, and even brokerage accounts, is that the fund only had 15% of the Fund's assets invested in small cap growth stocks.  But it is a small cap growth stock fund!  The fund isn't investing in what its title claims it invests in.  In fact, the writer points out:
Let’s say you decided you wanted to dedicate 5% of your portfolio to small growth, so you put 5% of your portfolio into this fund.  In reality, you’ve only put 0.75% of your portfolio into small growth, not 5%.
Please spend 5 minutes and read the article.  I believe it will be eye-opening for most readers and could save a good chunk of a lot of nest eggs over the longer term.

1 comment:

  1. Not all funds are what they advertise themselves to be, and they may suffer from style-drift. Shocker! Isn't that one of the reasons Index funds and ETFs were created in the first place.... so that asset allocators can be confident in what they are buying?