Hi, my name is Bob Brooks and today I want to talk about selecting mutual funds the best way to go about it, you know, the good thing about mutual funds is it kind of becomes a staple of the average investors portfolio. This is what for decades now, this is where average investors have gone to the problem is, is that there are so many mutual funds, how do you know what to select? Well, let me tell you the good news today is that it's all about criteria looking at criteria and looking at the answer to an age old debate. Now this would be a financial lease warning was in financial leases where was where advisor start talking about things that people glaze over using big technical terms. I'm going to explain everything so hang with me. But the the classic debate is, which one's better index funds or actively managed funds?

We don't really care what the answer to that is. We care what is underlying the underlying answer. That question will actually help you pick the right mutual funds. So I'm going to go through that. Now here's the thing to a couple things. First, a disclaimer, I'm not making recommendations or telling you what to pick.

I'm just giving you ideas. So don't walk away from Bob recommends that we do this. That's not that's furthest from the point. This is an educationally based teaching video. And that's what we're doing here. Second is a pop culture, finance belief warning.

The mutual fund industry is full of pop culture, finance. Now what that is, those are the beliefs that the industry wants you to believe. They don't want you thinking for themselves. They wants they act as if they're absolute truths. This always happens every time it works. You do it you'll be okay.

Now, what we teach here is Think for yourself. And there's a little bit of agenda, maybe a lot of agenda behind those, those beliefs that they're preaching from the pulpit. So you got to know that this pop culture, financial beliefs, got to be careful about that. Know the pros and cons and know that there's two sides to those beliefs. Even though they preach them like they are absolute truth. Now you know what I always say about absolute truth.

There's only one absolute truth when it comes to money. There are no absolute truths. Everything's got a pro and a con to it. So one of the first things that you want to that you want to understand about selecting a mutual fund is track record. And this, of course, is what is brought to the forefront. Anytime you sit in front of an advisor, they talk about, this is how this fun is performed.

Look at the growth, I got to tell you a little secret, I could care less about the growth. Now, growth is obviously something that's important. It's not the most single most important thing, there's 250 50 things that are important. I want to know how they did in good markets and I want to know how they did in bad markets. Because if this fund I'm looking at just when went down as much as the stock market did in a bad market. What kind of value is that really bringing me We'll talk a little bit more about this.

But one of the things you want to focus on is how they did in the down markets and how they did in the good markets and if they lost money in the day. markets which most mutual funds do, how long did it take for them to gain that money back, that's an important metric that you want to look at. And so what you start to see is that, hey, this is a money manager, who puts an importance on managing for risk. Love that. And that is something that's very important. And you're seeing more and more and more of that, as new mutual fund offerings are coming out.

Now, one of the most key things that you want to look at, and there's a lot of ways to measure risk when it comes to mutual funds. I single out just one because I want to keep this very broad and generic, so that you can have a takeaway that you can go and apply immediately, but it's called the beta and the beta will measure the risk of that mutual fund. Now here's the here's the gets very simple, okay. A beta of one means that that mutual fund is taking the same amount of risk as the stock market. So it's it's if the market goes down 30% this fun should go down around 30%. It's not an absolute truth, it's not an absolute measurement, it just gives you an idea.

Now, if the market goes down, if the mutual fund has a beta of less than one, that means they're taking less risk. Would you like to know that? If you are kind of risk averse, that you're taking less risk in the market. If there's more if Aveda is one plus, and is taking more risk the market Wouldn't you like to know that just to have just to have a good understanding of what kind of risks that that mutual funds taking. So it comes down to measuring out beta because it might be that you're in a risky environment, you say, you know what, I want to go with low beta tight mutual funds. I don't want to go with mutual funds that are taking a lot of risk.

So you pare back on your risk. This is one way to control risk risk. We've talked about it in other we've talked about it in other teaching videos is that you just lower the beta of your portfolio by using lower beta, that type of thing instruments mutual funds. Now having said that, you don't need to go back, if you have a mutual fund, it's got a beta of point five, then you would expect to go back to 2008, which was a horrible year for the stock market and see a much smaller loss than the overall market. hope that makes sense, because they're supposed to lose less than the market. And I've done a study on this.

And what I found is that funds with a lower beta lost way less than the market and they gained back that that that loss a lot quicker now, is that going to happen every time? Absolutely not. That's just one study that shows that shows those results. So measurement of the beta is very important. And you want to be able to know exactly what kind of risks that that's taking. Number two size of the fund these these mutual funds and their popularity can grow to be very, very big.

And the bigger these funds are, the harder it is, the more difficult it is for the manager to manage it. I don't know about you, but I don't want my money manager who managing my mutual fund to be up against any roadblocks beyond the roadblocks they're already up against. So you want to know how big that fund is. And if it's not enormous fun, maybe you want to think twice about that, because once these funds get this big it can and studies show does hurt performance. So you want to know that. The other thing too, is that they get so big, they closed the doors to new investments, because they can't handle new investments now, now you kind of have another dynamic that goes along with it.

And that also has been proven to affect performance. So you want to know the size of the fund. More of a medium sized fund kind of just right is what you might want to consider. experience of the fund manager This is extremely important because there's a lot of new fund managers who've never had not seen a bad market. Wouldn't you like to know that your fund manager is navigated through a down market where people lost a lot of money and came out okay. That's what you want to know.

So you want to see experience on your side. I was actually talking to a fund manager not too long ago. I was talking about the bond market where I think it's the filming of this. This video, I think is about to get into a lot of trouble. Because there's one stop explains that there's a different there's an inverse relationship. when interest rates go down, bond prices go down, excuse me, when interest rates go up, bond prices go down.

When bond prices go up, interest rates go down. Well, this is the environment we've been in bond prices have gone up. They've been doing great bond funds have been doing great. Now we're starting to shift to an interest rate environment that goes up. I did just a quick survey on experienced bond fund managers and found the vast majority of those fund managers have not had experience managing in a down market for bonds. This is problematic.

And he agreed with me said yeah, this is going to be interesting because we are in uncharted territory here and there is a lack of experience. So you want to make sure that your your fund manager has some experience in this area. As I talk through some of these criteria. You can just see that that big universe of mutual starting to come down and come down and become smaller and smaller. Now, here's what you need to know. The classic debate are index funds better than actively managed funds.

And this is debated all the time. And let me explain what I mean by this. an index fund is simply nothing more than a fund that mimics an index. So let's take the s&p 500. If it's an s&p 500 index fund, then it's going to do just about what are designed to do let me say that just about whatever the the s&p 500 to do not guaranteed, but designed to do that. So history would show that's been the case.

And that can change going forward. But that's what they're designed to do. So s&p 500 index fund, if the market goes up 30%, it should go up roughly around 30 cents. I mean, that's would be your expectation, but if it goes down 40% that fund should go down 40%. Now that's the index fund. Now the actively managed fund is a fund that doesn't follow it in dex it's managed, it's actively managed by a money manager.

They buy and they sell stocks and what they're trying to do is beat the index. Okay? Now studies would show this is the argument for index funds study would show that the vast majority of the time, actively managed funds Do not beat the index. So, and the expenses, pop culture, financial belief, expenses are higher in actively managed funds than they are in index funds. But there's a big difference between expenses. So the argument is, is that why should you spend so much more money on expenses when an index fund is getting about the same return or getting a better return because they're close to the index, and an actively managed mutual fund is not you know, might be coming in down here, and they've got the expense drag the index on doesn't have.

So that's the classic, the very classic argument, and I gotta tell you that I've had debates with people that that will go back and forth. And they'll say no, you don't understand index funds are superior and almost as if it's an absolute truth, because it's all about the fees. The fees, yes, the fees matter. But it comes down to the the answer to the debate is simply this is that actively managed mutual funds are good sometimes. And index funds are good sometimes and this is a key to really unlocking selecting mutual funds. So for instance, let me give it let me give it to you this way.

Index fund if the it comes down to measuring risk, if the risk level of the market is such at the risk level, the market is such that, that it's a low risk environment, it's a good time to be investing in stocks, then I would much rather prefer an index, a portfolio full of index funds, because they're going to track with the market if I think the markets going to go up over a long period I'd rather track with the market makes sense, right? But if we're in a risky environment, I would rather have a low beta actively managed fund. Because if I don't want to be tracking the market, if the market looks like it's going to go into a decline, I wanted to have my risk managed. That's where I think actively managed funds do a better job. So think about it from this standpoint, let's say you had money in an actively managed mutual fund and money in an index fund, the market goes down, okay, and loses 50%.

But this index, this an actively managed fund only lost 20%. Now, the actively managed fund has got a 1% higher expense ratio to it inside the fun, but yet it only lost 20% in the index fund lost 50 Which one would you rather be? That's what I that's why I find the dog that the argument being so dogmatic doesn't make sense to me because really, the answer is both make the most sense. You know, when it comes down to selecting mutual funds, it's important to always look at growth. Look at risk to dynamics and most of the time, pop culture financial beliefs will have you focus completely on the growth aspect. But it's 5050.

This is where the argument of the index fund versus the actively managed fund really works in because you invest in select from these two different types based on what you feel the market risk is. And so then you're you're managing for growth and you're managing risk, and you're making sure that you're setting yourself up for the highest probability of getting long term results.