Dear Mr. Berko: I have $48,000 and want to invest $16,000 in three different mutual funds, and I'm having trouble understanding those complicated analysis terms that are supposed to help me make a better fund selection. I don't understand the terms style, style drift, alpha, beta, R-squared, standard deviation and Sharpe ratio.
Isn't there a way to pick a good long-term mutual fund without having to have a degree in higher mathematics from Harvard? I thought that picking a mutual fund recommended by various financial websites I look at would be easy. But all these fancy concepts just make it more confusing for me to find the best fund for my retirement goal in 21 years. Thank you in advance for your help.
TW, El Paso, Texas
Dear TW: Those confusing concepts are seven reasons we're supposed to hire stockbrokers to help us make good investment choices. But the first problem is that a stockbroker will most often select the mutual fund that pays him the best commission. And that's not good!
The second problem is that a stockbroker is highly encouraged to recommend a mutual fund that is preferred by his firm. And that's not good, either, because too often there's a conflict between the broker's advice and his employer's interest. And the third problem is that I don't know of a single stockbroker who understands what those concepts mean.
Just for grins and giggles, ring your broker today and say, “Hey, Sam, tell me what a Sharpe ratio is, and what does R-squared mean, and why is this important to me in picking a mutual fund?” I'll wager you $10 to a road apple that your broker is unable to explain the investment merit of those terms.
Choices, choices and choices. There are more than 10,000 open-end mutual funds to choose from, and many professionals would have you believe that choosing the best mutual fund for long-term investing is as complicated as brain surgery. However, picking the right long-term growth mutual fund should be as easy as falling off a piece of cake, and you don't need all that fancy-schmancy nomenclature.
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