Dave's Mutual Fund Analysis Methods

Chad asks Dave where he does his research when he purchases mutual funds. Dave says he gets it from three main places.

QUESTION: Chad on Twitter asks Dave where he does his research when he purchases mutual funds. Dave says he gets it from three main places.

ANSWER: I pull the information from two things—two locations primarily. Actually three—from the actual fund itself once I narrow it down, but there are 8,000 funds, so how do you narrow it down? I buy some software from Morningstar that’s about $500 a year, and it gives me quarterly updates. They’re very old-fashioned in how they do it. They send you a CD, literally. But it’s the updated-once-a-quarter performance of mutual funds, and virtually every fund is in there. It’s a pretty amazing piece of software. You can really do a lot of queries, a lot research in there with that, to the extent you want to. Obviously, if you’re going to spend $500 a year on an investment tool, you’re probably doing some investing. It’s no theory for you.

The second thing I do is I call my ELP (Endorsed Local Provider). And I really do that. I know a lot about mutual funds. I have been licensed to sell securities. I’m not currently because I don’t want to be regulated on what I can say on the radio, and I don’t sell them anyway so it doesn’t matter. Even with my level of expertise, I love having someone else do the weed-through for me. I trust my ELP. He calls me up or emails me and says, “Here are three funds that fit the criteria you’re looking for.” And probably about 80–85% of my analysis of a mutual fund is based on its performance and long-term track record. I very seldom buy a fund that’s not been open 10 years, and I want to see what it’s done over a long period of time. I’m really not concerned with what it did last year. I’m hardly concerned with what it did over three years except as compared to other funds in that same category or as compared to the market. Did it underperform or overperform the market? Those kinds of things. If I’m buying an aggressive growth-stock mutual fund, how does it compare to other aggressive growth-stock mutual funds? Well, they were all down. Okay. The market was down, and so aggressive precedes the market. It takes a bigger dip than the market takes, typically, and when it goes up, it takes a bigger up than the market does. It’s more volatile than the market. It has a larger beta, it’s called. I’m comparing it that way.

I’m looking for performance first as compared to the market, as compared to other funds in its category, over a long period of time. That’s my primary thing. And I really don’t spend a bunch of detailed analysis. I’m not a big analysis guy. I’m pretty simple. You look at a long track record, and I’m in pretty good shape. I do look at the load on it and see how much the expense ratios are. It’s a small part of the equation—not much, but a small part. I may look at a couple of other things. I may look at the mix of the fund and maybe if the same players are managing it that used to be managing it when it made those returns—that kind of junk. I just don’t live in analysis long term, and I don’t have all my money in one fund or one fund family even. I have it spread out among different brands of mutual funds.

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