Are you thinking about adding to your portfolio or changing your lineup of investments? It’s wise to look under the hood and make sure you know what you’re getting before choosing an investment.
Reviewing a fund’s past performance provides a snapshot, which is a good place to start, but it’s not the only factor to consider. A number of other factors may be just as important in determining how well a fund fits into your investment strategy. The Securities and Exchange Commission recommends reading a fund’s prospectus and shareholder reports in order to learn more about the following before making investment decisions:
Fees and expenses
From sales loads to operating expenses, nearly every fund charges fees. But not every fund charges the same amount, which can lead to drastically different returns. For example, $15,000 invested in a fund with an 8 percent return before expenses and annual operating expenses of 1.5 percent would grow to about $54,800 after 20 years.1 If that same fund had expenses of only 0.5 percent, your ending balance would be significantly higher — $67,000.
Some funds can create a tax bill even if you don’t sell shares. You may have to pay taxes on capital gains distributions if a fund sells a security at a profit that can’t be offset by a loss. A fund’s turnover ratio tells you whether it trades securities frequently or primarily uses a buy-and-hold strategy. In addition, if a fund pays dividends, those funds may also be taxable.
Age and size of the fund
The short-term performance of a new or very small fund can be misleading. If the fund initially contains a small number of stocks that perform very well, the impact of those high-yielding stocks will likely diminish as the fund grows larger and incorporates more equities. Instead, focus on the fund’s long-term performance and its reaction to the market’s ups and downs.
Volatility and risk
A fund’s volatility can signal its level of risk. The fund’s year-to-year performance figures are available in the prospectus and annual report. They show how the fund earned its returns — slowly over time, or in short bursts of activity. If you are investing for a short-term goal, a highly volatile fund may be a poor choice. A longer timeline, however, may let you ride out the ups and downs of a volatile fund’s performance.
Changes to fund operations
If a fund makes a major change, such as replacing its investment advisor, adopting a new investment objective or merging with another fund, its past performance may become irrelevant to its future potential.
Consider the Big Picture
It’s important to consider how the fund will fit into your overall portfolio. Does the new allocation of funds still match your overall goals, timeline and risk tolerance? Your Seaside Client Advisor can help you build a portfolio to help you stay on track for your goals. Call today for an appointment.
1 Rate of return is for illustration only and does not represent the return of any actual investment. Your returns will vary.
This financial institution does not give tax advice. Consult your tax advisor for information specific to your situation.
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May lose value