GETTING AN INVESTING GAME PLANCreating It, Working It, Winning It phần 6

Chapter 6 Step 6: Pick the Players Consider the high school soccer coach who attends a two-week summer camp to learn about the latest strategies for building a good team. Now it’s fall and tryout week is underway. If she doesn’t choose the right play-ers for the appropriate positions, all her off-season work will be for noth-ing. For her team to succeed, the coach must put her newfound knowledge into action. The same goes for you, the investor, as you prepare to pick specific funds for your portfolio. So far you’ve decided on the general portfolio and allocation that you want to pursue. You’ve further refined your allo-cation by deciding which styles of funds to seek out. Now you need to se-lect the best and the brightest to execute your game plan strategy. On both offense and defense, you want the very best players in the leagues to fill those allocation slots. Ultimately, fund selection is where the rubber of all the investing theory meets the often bumpy road of market reality. I particularly relish this part of the game plan, and I hope you will, too. While your overall allocation will greatly determine the success of your game plan, the more successful managers can enhance that return through superior perfor-mance. Just as there are superior players for a team, there are also supe-rior managers. Finding those is our goal at this level of allocation. Deciding which funds deserve your hard-earned money is an impor-tant task. Just any fund won’t do—even if it is in the exact style and asset 117 118 Step 6: Pick the Players category you want. Just as all good soccer goalies differ from one another, funds within a given style type each offer varying degrees of potential for risks and rewards. When assessing a fund, it’s very important that it be in line with your overall portfolio allocation that we discussed in Chapter 5—and that it’s meeting your goals at the same time that it fits your ability to handle risk. You should be able to find appropriate funds for your portfolio needs from the thousands of funds on the market. How do you distinguish be-tween apparently similar-style funds? Some of the criteria used to judge funds can get very technical very quickly. But when it is broken down, nearly all the important information can be traced back to some basic who, what, where, and how questions. Finding Funds to Make the Cut • What style funds do you need to fit your allocation strategy? • How many funds are enough? • What is the fund’s track record? Look closely at 1987, 1990, 1994, 2000, 2001, and 2002. What was the fund’s performance when the markets stumbled? • Who manages the fund, how experienced is he or she, and how consistent has he or she been? • How much will it cost, and how much risk will it entail? • Where (stocks/bonds/industries) does the fund invest your money? Each of these questions will lead you to other criteria you might want to consider about each fund. Over time, either investors develop their own systems, their own artful approaches to the science of invest-ing, or they work with advisors. I’ll walk you through the process that I use to screen funds and outline the criteria that make or break my fund picks. But you’ll soon develop your own system and those research tech-niques, and your fund needs will evolve over time. No one fund is right for all investors or all portfolios all the time. How Many Funds Are Enough? 119 How Many Funds Are Enough? Before starting your fund selection, it’s good to have a general idea of how many you are looking for. This depends a good deal on the amount of money you want to invest, what your objectives are, and how much risk you want to take. Also, always remember that the funds must match your overall allocation. One reason people have several funds is because they may want to go beyond their core holdings and invest in specific sector funds. By doing so they should know they substantially increase risk in their portfolios, as we discussed in Chapter 5. You also need to be careful not to spread yourself too thin. Some funds have minimum investment amounts of anywhere from $1,000 to $10,000. Sometimes it’s even higher. If you have limited money to in-vest, there are only so many funds you can buy shares in. Table 6.1 should be used only as a general guideline. It assumes you are not using any sector funds. If you use any special team/sector funds you would need to add one or two sector funds per portfolio, but gener-ally, as I’ve said before, you should limit them to no more than 10 per-cent of your portfolio. Of course, the chart also assumes you have already allocated specific percentages of your portfolio to offense and defense. You’ll also probably notice that investing under $100,000 into seven or fewer funds may not enable you to meet all the percentage al- Table 6.1 How Many Is Enough? Investment Size Up to $50,000 $50,000 to $100,000 $100,000 to $500,000 $500,000 and more Number of Funds (Not Including Special Team/ Sector Funds) 4 to 5 funds 6 to 7 funds 8 to 10 funds 11 to 15 funds 120 Step 6: Pick the Players locations of the model portfolios in Chapter 5. Don’t sweat it. As I’ve said, you’ll simply want to use the portfolios as guidelines. As you have more money to invest, you’ll be able to choose more funds that will fur-ther diversify your portfolio. Alternately, if you have an advisor, you and your advisor can create your own allocation formula for any amount you have. What Is the Fund’s Track Record? Avoiding the Top 10 Trap Many of my clients walk into my office with a newspaper or magazine ar-ticle ranking last year’s hottest funds. Their question: Why not just pick the most profitable funds from last year and let it rip? My answer: It just doesn’t work that way. If I had my way, I’d eliminate all such ranking charts because I think they wrongly focus investors on a fund’s short-term history rather than the long-term track record. Pulling Rank: The Numbers behind the Numbers When comparing funds by rankings, it is important to understand the differ-ence between a percentage ranking and a numerical ranking. In Table 6.2 you will notice columns showing the percentage rank as compared with the fund’s category. A fund in the top 1 percent shares its spotlight with others. By that I mean that if there are 3,000 funds in the category and a fund has a 1 percent ranking, it is just one of 30 funds rated in the top 1 percent (3,000 ´ .01 = 30). While the top 25 funds are ranked by percentage in each year, they are ranked numerically for the entire period of 11 years to actually show the top 25 funds over the long term. Separately, Table 6.3 shows an actual numerical ranking of performance to reveal the 10 top-performing funds for each year. When funds are ranked numerically as they are in the latter chart, they stand alone in all their statistical glory. ... - tailieumienphi.vn