How to Choose a Mutual Fund


As someone who advises people how to manage their money, I am often asked how I choose the investments that I recommend or buy on behalf of clients. There are a few ways to go about answering such a question, but the simple answer is that I’m cheap.

You may have already figured that out if you have read any of my DIY articles recently. One cause of my parsimony is certainly due to a father that passed along a frugal streak that earned him a nickname of Squeaky. It was said that he was so tight, that he squeaked when he walked.

But while the thrifty trait very well may have been passed through DNA, the behavior has been nurtured by observations as well. Perhaps the most compelling research has been Dimensional Funds annual Mutual Fund Landscape, which once again reveals the power of penny pinching.

For the past dozen years, Dimensional has looked at how many mutual funds beat their benchmarks, after costs. They include thousands of domestic and foreign equity funds as well as those that invest in fixed income. This short video summarizes those observations.

While the video concludes that past performance isn’t enough to predict future results, the study’s most compelling finding wasn’t highlighted. That finding was that significantly more funds with low expenses beat their benchmarks versus those with higher expenses, as can be seen in Exhibits 1 and 2.

EXHIBIT 1. Equity Funds Winners and Losers

High Cost Equity Funds 2018.png

EXHIBIT 2. Fixed Income Funds Winners and Losers

High Cost Fixed Funds 2018.png

We could debate other criteria for fund selection, such as whether to buy passive versus actively managed funds. We could discuss the evidence that supports investing in undervalued, small, and profitable stocks. We could even have a spirited conversation about what provider does it best. But the best advice I can give anyone looking for a fund to buy is that you get what you don’t pay for.

Are you paying too much but don’t have the time, interest, or discipline to go it alone? Get in touch.