Buzz
In my post from Wednesday, I covered how to examine the 401(k) funds provided by your plan manager and recommended tools like Yahoo Finance or Morningstar. Today, I'll dive into the specific details you should focus on when researching these funds.
This was sparked by an email from Stephen (not the same Stephen from yesterday’s question):
Would you be willing to 1) create a guide on the financial tools available for researching stocks like Yahoo Finance, Morningstar, and others? 2) highlight the key information we should be looking at and explain why.
Let’s begin with Morningstar. If you’re unfamiliar, Morningstar is an investment research firm that strives to provide everyday investors with the same information that financial professionals use.
A valuable feature Morningstar offers is a search tool that covers virtually any stock, fund, or ETF. You'll find it conveniently located at the top of the page when you visit the site.
To investigate a fund, start by reviewing the 401(k) options your employer provides. Most companies offer somewhere between eight to twelve different funds, though some may offer more. To dive deeper, simply enter the fund name or its ticker symbol into Morningstar’s search bar. For example, your company might provide the following options:
And so on. After entering the name, you’ll be directed to a detailed profile page for that fund.
The quoted price you see isn’t necessarily the key factor to focus on, as your goal is long-term investment. Short-term price swings shouldn’t concern you. However, the page also provides valuable insights into expenses and the investment style/category right on the main page.
The sections to focus on are Performance, Portfolio, Expense, and Purchase. Performance shows how the fund has performed historically (though keep in mind that past results are not indicative of future performance). Portfolio offers a breakdown of the fund’s holdings, including companies, industries, sectors, and the stock/bond ratio. If you're investing in a broad market index fund, it should contain dozens or even hundreds of holdings. (For instance, if your fund tracks the S&P 500, it will include 500 different companies.)
Expense outlines the expense ratio and shows how it stacks up against other funds. Ideally, look for large-cap funds with expense ratios under one percent, and small-cap or international funds with ratios under 1.25 percent. The page also includes other fees, which you can read about here.
Passively managed funds typically have lower expense ratios than actively managed ones and tend to perform better as well. “Vanguard 500 Index (symbol VFINX), which tracks the Standard & Poor’s 500-stock index, has outperformed 80 percent of actively managed large-company, U.S.-focused stock funds in the past three years,” reports Kiplinger. With an expense ratio of 0.14 percent, it’s an example of funds from Vanguard and Fidelity that often feature fees lower than that (if your employer offers them, that is).
Lastly, Purchase highlights any requirements for buying shares, such as minimum investments. While you can also look at Morningstar’s rating, I’d suggest focusing on the other categories first.
All of the pages provide useful guidance, but these four are the most important. This article gives a solid breakdown of additional details you can find on a fund’s profile page.
