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Can't wrap my head around investing

February 25th, 2008 at 03:41 am

This is so frustrating. I'm an engineer. I've always been good at math. For my degree, I had to take two semesters of calculus, differential equations, and a real bear of a class called Engineering Mathematics (Bessel polynomials, anyone?). I got A's in the first three and a B+ in the last one. So I am not math-phobic by any means.

But I just can't get my head around the process of analyzing the numbers associated with mutual funds. This is not math, folks, it's business, and I hate it. I sit there and look at total returns and expense ratio and loads and my attention just seems to slide off the screen.

DH and I sat down today to look at mutual funds. Both our IRA's have some cash that needs to be invested -- about $70k in his (from rollovers), and about $15k in mine. We've had a lot of difficulty in the past whenever we talk about investing, so it was real progress just to be sitting side by side, not really talking, but each looking at mutual funds on our separate laptops.

So I pull up the Etrade Mutual Fund Screener and start entering criteria. I decide to try to look for a no-load domestic mid-cap fund with an expense ratio under 1%. (Why do I choose this? Because a year ago my full-service broker mentioned that I don't really have much mid-cap in my portfolio, and that would be one area I could consider adding.) This narrows the field down to 25 funds. But how do I know that this selection will give me the best quality? Maybe it would be better to limit the search by capitalization instead? I see some companies I've heard of, like Fidelity, and other I haven't, like FPA.

I click on the Performace tab. Look at Fidelity Value (FDVLX), just to pick one. The manager's been there 12 years, which I like and the name isn't as specialized as something like Fidelity Select Chemicals. Etrade has tagged it "all-star", but Morningstar only gives it 3 stars.

Returns are:
1yr 3yr 5yr 10yr inception
-6.41% +8.80% +16.41% +9.51% +13.75%

So if I believe Bogle that funds generally "return to the mean", is this fund on its way up or down? Beats me. The 3yr is under 10%, the 5yr is over, and the 10yr is close. The negative 1yr return doesn't bother me -- stocks have been down lately, maybe it's bargain time?

Expense ratio is 0.70% for both gross and net. Some on the page are as low as 0.50%, others as high as 0.90%. Is this significant, or is anything under 1.00% good? Is 1.00% the magic number, or is it 1.50% or 2.00%? I don't know.

I click on the risk tab. 4 more columns of numbers. I can't remember the difference between the different risk measures, and whether higher or lower numbers are better. I don't feel like looking it up again. Even if I knew what the numbers meant, I don't know the range of numbers for a given parameter that would be acceptable to me.

I click on the link to look at the fund's page. Top 5 holdings are Owen's-Illinois, Xerox, Avon, Agilent, and Eastman Kodak. I know Agilent was spun off from HP, or was it Motorola, and Kodak isn't a player in the digital camera realm, but are they good companies to invest in? Who knows? I'm buying mutual funds because I don't want to analyze stocks!

Let's look at the chart comparing it to a benchmark. From 1998 to 2005 it essentially tracked "Mid-Cap Value" (I need to look up what that is again to confirm that it is a mid-cap benchmark as the name implies), and then in the last 3 years it's been maybe $2k higher. I vaguely try to remember whether it's Fidelity or Vanguard that is the king of index funds. The arguements I've heard (was it from sweeps?) for managed funds have swayed me toward them over index funds, although I couldn't for the life of me tell you what they were.

It's paralysis by analysis. I know enough to know that I don't have an intuitive feel for what I'm looking at. If I were to pick this fund, so far the real reason for my choice seems to be that I recognize the company (Fidelity), they chose a simple name (Value), the manager has been there 12 years, and the returns since inception are good. Is this rational?

By this time my eyes are glazing over, and I've only looked at one fund!

I think this is why so many people default to picking index funds or ones Etrade or Morningstar has tagged as "all-star". It's certainly why I've stuck with a full service broker so far. Maybe I could've gotten a better return picking my own no-load funds, but maybe my paralysis would've made me too conservative, who knows?

DH wants to use Etrade and pick his own funds in his retirement accounts. I'd like to understand enough to have an intelligent conversation with him about the funds he picks. And I'd like to be able to have an intelligent conversation with my full-service broker about the funds he recommends.

I'd like to feel confident enough to make a decision about how to invest my money.

3 Responses to “Can't wrap my head around investing”

  1. merch Says:

    Interesting. When I usually look at actively managed mutual funds, I look at longevity of the portfolio manager and 1 and 5 year returns.

    The interesting tidbit is that 75% (I think thatís the number) under perform their benchmarks. So I personally try to stay in index funds in my retirement.

    I was looking at my allocations and noticed that my exposure to mid-caps is via a S&P 500 fund. If you invest in a total market fund, youíll have exposure to mid-caps.

    I just never thought of exposure to mid-caps that big of a deal. Sorry for my ramblings and lack of help.

  2. Broken Arrow Says:

    Hehehe. Well, the bright side is that the both of you are interested in investing, right? It could be worse. Your hubby could be interested in buying expensive toys and that's it....

    Something tells me that it may be best to separate your investment money as well. Perhaps give him control of 5-10% while you control the rest of the 90%. As I mentioned in the forums, the level of risk doesn't have to change....

    Your post reminds me of Albert Einstein's quote, "The hardest thing in the world to understand is income tax." However, I don't think he meant it to say that he can't calculate it... but merely the fact that as a human device, its conception and execution makes very little sense to him since it's not governed by any natural laws or principles and is subject to change at any time.... In a way, the same can be applied to mutual funds as well. So, it doesn't mean there's anything wrong with you, and I wouldn't feel bad about it. Smile

    As for the rest, since you've posted this in the forums, I'll make my comments there....

  3. Ima saver Says:

    I have my retirement money inVanguard Index 500. I have been with them close to 20 years and I am pleased. They have the lowest fees also.

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