When reviewing your portfolio, you might think: All I own are mutual funds. Maybe I should buy that new exchange-traded fund the experts on TV are bragging about. Perhaps I should add to my commodities holdings since gold, silver, and other metals were so hot last year.
Here's my advice to anyone who thinks they need to spice up their investments: Don't do it. Mutual funds are the most tried-and‑true investments around. Yes, they're boring. Mutual funds usually don't have a blowout quarter in earnings or announce share buybacks or two‑for‑one stock splits. There's just not a lot of buzz surrounding them. If what you're after is entertainment, go gambling in Las Vegas. But if you want to accumulate money for your retirement and other goals, mutual funds are the way to go.
As tempting as it may sound, adding a new and trendy investment to your investment mix might increase the risk in your portfolio and your returns could suffer. In fact, some of the securities created and strategies promoted by Wall Street in the last several years have turned out to be very harmful. For example, many individual investors were sold auction-rate preferred securities (ARS) as an alternative to safe money market funds. (ARS are debt securities with regular interest rate resets that are sold through auctions.) When the credit crunch of 2008 threw ARS instruments into a tailspin, the securities lost value and some investors' accounts were frozen for several months.
We also shouldn't forget the lessons learned from the damage caused by investment advisor Bernie Madoff. His promises of consistent returns of 2 percent per month were too good to be true. More importantly, no one understood exactly what Madoff's investment strategy was.
Instead of buying into a good story or new product, my company searches for mutual funds with consistent returns over many years, and a manager who has been running the show for a long time. One we've found is Wasatch Large-Cap Value (symbol FMIEX), which has returned an annualized 7 percent for the last decade, beating the S&P 500 index almost 6 percentage points per year. Ralph Shive, manager of the fund since September 1996, has proved he knows which stocks to buy, how long to hold them, and when to sell—even during tough market conditions.
The success of Shive's fund also shows that you don't really need a big brand name like Fidelity in your portfolio. Along with the Wasatch fund, Hodges Fund (HDPMX) is another great fund you've never heard of. The Hodges Fund, like the Wasatch offering and others, are not heavily marketed or scrutinized by the media. Many little-known funds are offspring of institutional money managers who focus on serving university endowments, pensions, and large corporations. These managers were so successful that they were urged by customers to launch funds that their friends and other investors could invest in.
Wall Street will continue to launch flashy new ETFs and other investments that might not be right for you. You don't have to chase the latest trend or gimmick. Look for fund managers with steady track records year after year to find the best mutual funds. If you stick with the tried‑and‑true mutual funds, your money will grow faster over the years.
Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast-to-coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth About Investing (April, 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC-registered investment adviser, which provides mutual fund and asset allocation recommendations and research to stores in The Mutual Fund Store system.