Mutual What Now?!

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Third work day into the New Year, how's it treating you. For me it's just another Wednesday full of chewing bubble gum and taking names..well not really but I am being very productive. I've been getting a lot of requests from former clients and new ones about reviewing their year end statements and giving them some insight on what their next moves should be. In our conversations I try to make people tell me why they made the decisions they've made so far, what were/are their intentions, and in what direction do they think they should head? More often then not I get a blank stare and an attempt to regurgitate a news quip about markets from the week. I'm not here to poke fun because it's OK, we all get busy and lose track of time or our retirement funds and portfolios. Because I can't be there with all of you when you are opening your statements or talking with the professionals you work with ( or check this out and I might be a good fit for you) I want to just go over two main differences in styles of funds. I'm assuming that in most retirement plans whether they are state programs or privately provided by employers you are dealing with mutual funds for the most part. I want to take this time to just review the big differences between growth and value funds. 

Before we jump into the differences we should talk about how mutual funds are priced and what styles actually are. Think of mutual funds as big baskets and in those baskets go all different stocks, bonds, commodities, and other investment vehicles. Mutual funds are priced at the end of the day based on the performance of their underlying investments. Now I won't get into the ratio's and metrics here but you can check one of my posts or this one from Neal at the Wealth Pilgrim to learn a little more about how they are calculated and how they behave. Next is how they are managed. Mutual funds are actually businesses on to themselves. Whether stand alone or as part of a bigger financial institution there are entire staffs dedicated to making sure mutual funds perform as they are advertised in their prospectus. Money managers decide on a daily basis what goes in and what goes out along with how allocations are divided up. Whether a fund is focused on capital appreciation or yielding consistent income streams it is up to the management to make sure the right balance of underlying investments are incorporated. That's why their are fees associated with the funds on top of the transaction funds - you are allegedly paying for that management service. 

Growth Funds:

• Just like it sounds funds whose underlying investments are positioned to grow faster than peers.
• These funds actually seek capital appreciation 
• Focus on profits and cash flows - is the business generating cash at faster growing rates then it is spending it.
• Fund managers can pay over valued prices on instruments that they believe will be top performers
• Can carry extra volatility because of inherent "bets" made on the projected future performance of underlying investments - think bubbles like housing and tech.

Value Funds:

• Funds that look for good "deals" or underlying investments that are undervalued according to the market
• These funds have more long term plays in them often buying and holding, riding business cycles - collecting and paying dividends along the way
• Volatility is often lower as they are invested longer
• Funds look at earnings: EPS and P/E metrics to find plays where the market perceives lower performance in the future but has potential
• Risk of finding something at such a sale or so undiscovered that it doesn't ever actually perform to expectation - can create a drag in portfolio

Take a look at how you are invested in whatever portfolio you have. If you don't have anything going for you jump to a Yahoo Finance or CNBC and create a hypothetical one. Pick out some funds that you would want to be invested in and start to follow them. 

Feel free to leave your picks in the comments below because I would love to follow them and talk about them with you!! Maybe even get a portfolio game going - who knows?! :) 
 

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