STOCK TO STUDY: T. Rowe Price Group, Inc ... - BetterInvesting

FEATURE | Cover Story
by Danielle L. Schultz
For many of us, BetterInvesting’s method ology for picking
stocks has been a durable and reliable guide. But most of us
have investments beyond stocks. Often those investments
are mutual funds. Perhaps it’s because funds are the only
options in our workplace retirement programs or college
savings plans.
Maybe we simply don’t have the time to select
and manage a large number of individual
stocks. We may want to incorporate other
types of assets in our total portfolio.
Mutual funds are often promoted as the no-brainer
solution, but savvy investors know there’s no such
thing. Mutual funds offer great diversification to a portfolio,
but as with all investments, the more knowledgeable
you are, the better choices you make.
Here’s a top 10 list of issues to consider.
1. Don’t Wish Upon a Star
Managers who perform well in a given year are raised
to the heavens by the popular press. Problem is,
they’re about as reliable as a meteoroid. Sooner or later
they flame out, and by the time they garner press
cover age, the oppor tunity is often over.
The performance of active managers — managers
who use their personal research and judgment to
select a fund’s investment mix — may be outstandingly
good or bad over a short period, but over time
research shows that they usually lag index funds
(funds that are passively managed and seek to duplicate
a market index).
In the few cases in which active management has
done better over time, the difference between active
and passive funds has been so small as to be attributable
to nothing more than chance. Pick any decade. You’ll
find spectacular money managers who subsequently
produced stunning losses. As we all know, past performance
is no indicator of future success.
If you want to select investments based on an
assessment of market factors, you often may be better
off selecting individual stocks using Better Investing
principles rather than hoping an active manager will
do it for you.
2. Understand the Costs.
Every week in my financial planning practice I see
clients whose portfolios contain mutual funds for
which they’ve paid high sales commissions and high
management fees, while the same type of investments
could have been made for far lower costs. It’s important
to understand both of these types of costs. There’s
no reason to pay a sales commission for a passively
40 | BetterInvesting | March 2013