June 28, 2017

The Best Questions To Ask To Be A Better Investor

Ask the right questions to improve your investments. Start with these questions to ask yourself or your advisor.
Dawn Doebler, MBA, CPA, CFP®, CDFA®, Senior Wealth Advisor

In 2016, 44 percent of US households—or about 54.9 million—owned mutual funds in their retirement and investment accounts according to the Investment Company Factbook.  The median amount invested in mutual funds is $125,000 making them a major component of many US households’ investment wealth.

Given that so many of us invest in mutual funds, it’s important to understand what they are, how they work and how to know if you have selected the right mutual funds that best achieves your goals.

In Think Like An Investment Advisor To Be A Better Investor, Nina Mitchell, Senior Wealth Advisor at Bridgewater Wealth provided a great primer about how to analyze mutual funds for your portfolio. In Part II, we want to arm you with questions that you can use to decide whether a specific mutual fund is a good investment for your portfolio. 

The relevant questions differ slightly, depending on whether you are selecting and managing a fund on your own or assessing the quality of investments recommended to you by a professional such as a broker, investment advisor or financial advisor.  Also, consider that performance is only one dimension of the benefits you receive from a particular mutual fund investment.  Factors such as tax efficiency, risk, expenses, and deciding when to buy and sell contribute to the overall return and should be considered during your analysis of when and where to invest your money.  

Let’s begin with a list of questions that apply to both do-it-yourself investors and investors who are working with a financial advisor or broker.  These initial questions may help to determine the quality and appropriateness of the mutual fund you are considering:

  1. ‍What is the main goal and investment objective of this fund? (Does it fit into your investment goals and objectives?)
  2. How much will I pay in internal expenses for this fund? (Are the fees reasonable compared to other similar funds?)
  3. Has this fund performed in-line with the relevant comparison index? (If this is a US Large Cap fund, how does it compare with the S&P 500? If it’s a bond fund, how does it compare with an Aggregate Bond Index?)
  4. Who manages this mutual fund? (What do you know about the fund managers and their investment philosophy?)
  5. Would the underlying holdings of this fund diversify my portfolio, or do they hold investments I already own? (How does their top 15 holdings compare to other investments that you own?)

Get the facts by reviewing a fund fact sheet

All of these questions can be answered by reviewing a fund fact sheet.  If you are a do -it-yourself investor you can find the fund fact sheet online directly from the mutual fund company or through a security information source such as Yahoo Finance or Morningstar.  If you are using an advisor, we recommend you request the fund fact sheets directly from them.  Securities regulations intend that these fact sheets be understandable for an average investor, and mutual fund companies are required to include specific standard information in this document.

Do-it-yourself investors

In addition to reviewing the fund fact sheet for each mutual fund investment, if you’re a do-it-yourself investor, ask yourself questions about the purchase, ongoing management, and selling process you’ll use for this investment.  Start by considering the following:

  1. ‍How will I monitor the performance of the fund on an ongoing basis?
  2. What events would cause me to consider selling the investment? Do I have the discipline to stay invested through a down market?
  3. What is the appropriate placement of this fund – in my retirement or my taxable account? (Do you understand why location matters?)
  4. Do I need this investment to be liquid on a moment’s notice? If so, are there any liquidity limitations on this fund?

For more information on how to construct an investment portfolio, read: Investment Soup: A Recipe for Financial Success

Investing through a financial advisor or broker

If you have hired someone to purchase mutual funds on your behalf, some important areas to explore include fees the advisor will charge (this helps determine the extent to which their advice may be biased by their own compensation) and whether they have a well thought out and consistently executed investment philosophy.  We recommend you ask the following questions for each investment an advisor suggests for you: 

  1. ‍What fees and commissions do you receive if I invest in this fund?
  2. Are there any back-end loads (meaning fees) if I decide to sell this fund in the near-term?
  3. Do you have access to lower cost Institutional share classes?
  4. What is your firm’s investment philosophy and how does this fund reflect that philosophy?
  5. Do you favor active or passively managed funds?
  6. How does this fund match with my Investment Policy Statement?
  7. How do you analyze and decide when to buy, hold, or sell a fund? Will you buy this fund in one purchase or dollar cost average? 
  8. How often will you rebalance my entire portfolio?

Know what you own and why

Selecting a mutual fund may seem like a complicated task. You can simplify the selection process by starting with a clear understanding of your overall investment objectives and risk tolerance.  Use that criteria to narrow the field of choice to only those funds that match your specific portfolio objectives. Then utilize these questions to help you select the fund that provides the best balance of performance, expenses, tax efficiency and liquidity.  If you are outsourcing your investment process to a professional advisor, start by determining whether your advisor has a disciplined investment methodology and assess how that philosophy aligns with your long-term goals. 

Being an informed investor will help you to stay in control of your investments and ultimately, the goals you want to realize over time.      


Shawn: Now you hear all kinds of deals about leasing cars, how can you negotiate a better deal if you want to lease?

Nina: Okay, well many people don't realize that they can actually negotiate the sticker price on a leased car in the same way that you would do that if you're buying a car. And since when you lease -- when you're, you know, your lease payments basically cover the depreciation, the difference between the sales price and the residual value. So it's definitely in your best interest to try to reduce that sales price as much as possible because then you'll pay you know, smaller dollars over the life of the lease. Make sure you pay attention to the down payment at the lease signing. And so here's an example, you might see an ad that says you know, lease payment is only 1.99 a month and that sounds like a great deal for thirty six months. The catch is, is that it might require a $3,600 down payment. So, if you amortize the down payment, then actually that 1.99 special, becomes 2.99. So, you really have to kind of look at total costs. 

And then lastly, dealerships use the term, money or lease factor, when they're calculating your financing costs and a lease factor is not the same as an interest rate. So, you have to make sure the dealer converts that lease factor into a comparable interest rate so you know what your financing charges are. 

Shawn: At the end of the day, does one method wind up being more expensive more often than the other, or can we tell that?

Nina: You know what, it really depends on how long, if you're going to hold the car for a long time, you're better off buying. But if you know, and if you're not, if you just really enjoy driving and you want to have a new car, then go ahead and lease. I mean, there's pros and cons to both, to be honest with you, it's not one size fits all.

Shawn: Alright Nina, great. Happy Thanksgiving to you. Alright, Nina Mitchell is with The Colony Group, for more go to wtop.com and search Her Wealth.

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Dawn Doebler, MBA, CPA, CFP®, CDFA®, Senior Wealth Advisor

Dawn’s experience spans more that 25 years providing wealth management, financial planning and corporate finance solutions for clients. As an MBA, CPA, Certified Financial Planner (CFP®), and a Certified Divorce Financial Analyst (CDFA®), she is uniquely qualified to understand the challenges and financial needs of clients from executives to entrepreneurs, as well as single breadwinner parents. Dawn is a weekly contributor to WTOP radio.