Stop Getting Bullied by Bad Mutual Funds

Remember that kid in grade school that was always in trouble for beating people up?

He was always in detention and always got written up for roughing up other kids, and as they got older not much changed.

These are the bullies that you wanted to stay away from, because if you got too close you would probably get beat up to.  Not fun.

In the investment world, there are mutual funds that fit this description to a 'T'.

They have had a horrible track record and if you get too close by putting your money into them you get your butt kicked.

Recently I had a meeting with a potential new client, and I was floored at what investment options he had.

His financial advisor had put him into six different mutual funds and was not well diversified at all.

What made matters worse was four of the six mutual funds he owned were flat out horrible.

When I say horrible, I am being generous.  They were just flat out bad mutual funds.

Today I want to show you a quick way on how I can look at a mutual fund and instantly know if it is one of those bad kids that you need to stay away from.

Identifying the Bad Eggs

I have various tools that I can use to do a quick screen on a mutual fund. One of the ones I like to use because it is really easy to pull up is Thomson Reuters. Thomson Reuters has a product called Investment Tool that has a database of almost every single mutual fund that exists out there.

If you have a mutual fund and you want to know more information about it, I can either pull it up by name or symbol and have awesome data at my fingertips within literally seconds. Below you will see some screen shots on some of the data I found on one of the mutual funds.

As far as which one of the six picked, it definitely was the worst of the worst that this guy had in his portfolio. But the other ones weren't that much better.

Let's look at the first chart. The first chart shows a growth of $10,000 over the course of the last ten years and then is comparing it to an index of the Russell 3000 Growth Index.

There's bad and then there's this mutual fund

When you look at the graph, the royal blue line represents the mutual fund and the greenish teal line represents the index. You notice how far the blue line is below the teal line?  What that basically means is that this mutual fund sucks. This thing has continuously been below its index over the last ten years.

Why in the heck would you ever pay a mutual fund manager to manage your money that they can't even keep up with the index?  The simple answer is: You shouldn't. 

This mutual funds needs to be sent to the minors

For all you sports enthusiasts out there, a little analogy I like to use is using baseball. Let's say that the average major league batting average is .250.

If the index (Russel 3000 index in this case) is batting .275, then this mutual fund is batting about a .180. Yikes!

If you are a major league baseball player batting .190 then most likely you won't be in the major leagues that much longer. Just by looking at this quick graph one would wonder why any financial advisor would recommend this to their clients? Frankly, I asked myself the exact same question and I couldn't come up with a good answer.

Comparing Mutual Funds

The last chart shows how this mutual fund has compared to other funds in its index. According to Lipper which is just another tracking type company on investments including mutual funds, it ranks this mutual fund in the multi-cap growth fund category.

Constantly a bottom dweller

If you look at the chart, you will see that we have going back 15, 5, 3 and 1 years. So if we look at this mutual fund over the last 15 years, you will see that there are 200 funds in its category.

Of those 200 funds, this mutual fund placed #180. What that means is that there are 179 other funds in this category that have done better than this mutual fund placing it in the bottom 25%.

Once again, what does that mean? That means that this mutual fund sucks.

Going forward to the 10 year, there are now 336 mutual funds in this category with this fund placing 254th, meaning that once again there are 253 mutual funds better than this one.

I think you get the gist, but let me go ahead and say it; that means that this mutual fund sucks. Although we did see some improvement over the five, three and one year outlook having it moved into the third quartile, it is still well below a lot of other mutual funds in this category.

Beware: Avoid Bad Mutual Funds

Unfortunately, I see these types of mutual funds in many different client portfolios and I can almost argue that this is criminal. As mentioned previously, it literally took me just a few minutes to take a quick look at this mutual fund to see how horrible it really was. I can't imagine how any other financial advisor could honorably recommend this to anyone.

The client that had actually bought the mutual fund roughly about five years ago and has owned it ever since; that was actually the same case for every other mutual fund in his portfolio.

When is the last time you reviewed your mutual funds and made sure you don't have any bad kids in your portfolio? It might be a good idea to double check.