Helping inexperienced investors such as women, minorities, and immigrants improve their financial knowledge to get better results from your investments in their IRAs, 401ks, and retirement accounts.  

Warren Buffett and Charles Munger's prescription for the novice/average investors ( passive) investor with a long-time horizon is a no-load index mutual fund. A novice (passive) investor is someone who does not understand the fundamentals of investing. The novice investor comprised 90% of the working population in the U.S. Most of this group are familiar with mutual funds from their 401k plans.  

 

However, passive investors (someone who does not pick individual stocks) still have to make investment decisions on which mutual funds to use. To help my readers, I created a checklist on how to select an index fund.

 

  • Use index funds, for example, Vanguard Funds and Dimensional Funds. If you cannot beat the market, at least, you can be the market.

  • Try not to look at your investments every day. Do not switch investments to time the market. The longer the holding period, the higher the probability of a positive return.

 

  • Make sure you select funds with low expense ratios. Less money is going to mutual fund pockets, and more of your money is staying in your pocket. There is no free lunch in the investment business.

 

  • Pick funds that have a low stock turnover rate of less than 20%. A fund with a low turnover rate means the fund's operating expense will likely have a lower expense ratio. A Morningstar study showed a lower turnover rate had mutual fund return performance was better over 1-year, 3-year, 5-year, and ten years when compared to high turnover funds.                                                                                                         

 

  • The investment fund must have at least five to ten years of performance history.

  • Beware of individual fund managers' changes that have to happen within the last year.

Try not to use too many funds in creating your portfolio. Less is more. I recommend using the Vanguard Total Stock Market Index Fund and Vanguard Total Bond Market Index fund for my beginning investors. The individual allocation is base on how much loss the investor can tolerate psychologically.

How To Pick Your IRA/401k Funds Investments?

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