More Straight Talk on Investing

9How to Pick a Mutual Fund (and How Not To)

Once you have decided how to allocate your assets among stocks, bonds, and cash, you are ready to consider selecting specific investments. In this chapter, I will show you a straightforward way to go about selecting mutual funds and ETFs. I won't recommend specific funds, although I would love to! Rather, my objective is to give you guidance on evaluating funds and assembling a balanced portfolio, as well as an understanding of the trade-offs that are involved in choosing one fund over another.

The goal is to “buy right and sit tight”—that is, pick funds that will suit your needs and serve as durable components of your portfolio for a long time. You don't want to be changing your investments as frequently as you change the oil in your car (or the tires, for that matter) because that would be counterproductive. By choosing funds judiciously, you can construct a portfolio that will serve your needs for years—even decades—and require relatively few adjustments. That's the route to building a solid investment portfolio, which, as I noted in the previous chapter, is critical to long-term investment success.

First, just to be clear, here's how not to select funds:

• Don't buy whatever is recommended on a financial website, on television, or in magazine articles without further due diligence.
• Don't buy a fund purely because it topped the performance charts over the past 12 months, or over any shorter time period, for that matter.
• Don't buy ...