Just like checking up on your physical health, it’s a good idea to do a periodic review of your investments to see how well you are doing. When the statement arrives, it’s easy to see what the total numbers are and how they have grown or decayed -- but how does this really relate to what you expected and where you wanted to go? Every once in a while it’s worth it to dig a little deeper and see if your investment choices still make sense for you and if they are still working as intended.
It's like reading that cereal box...
How many times have you idly read the labels on a cereal box while you happily munched your morning breakfast and pondered the ingredients and nutritional information. Most times it’s a happy exercise in reassurance as you congratulate yourself for choosing a product that is low in sugar and fats and high in proteins and dietary supplements. But occasionally you find an unexpected addition that you never knew was in the box. Somehow you know that this is not good for you in the long run. Maybe you should change your morning routine and find a better product. Checking up on your mutual fund investments is just as easy.
What are Morningstar Reports?
One of the investment industry’s basic guides is the Morningstar Investment Profile and it is used by professional and individual investors as a quick guide to understand a fund. In a one page tear sheet the service provides all the basic information that an informed investor needs to evaluate his investment. The Morningstar reports are provided free from their website, although they do require a registration and will try to sell you an upgraded premium service. The basic information that you need is available free. If you have fund investments through a financial services firm, or through Colorado PERA, the Morningstar Profile is available through their website.
Understanding Morningstar Reports
First check the Investment Information. This is just like reading the ingredients on the cereal box. Under the heading Investment Objective & Strategy you will find a plainly worded description of what type of securities are in the fund. Just like a cereal might include wheat, corn, rice, or ancient grains, this description will include ingredients such as bonds, stocks, foreign securities, and an indication of if they are large or small companies. The funds style is also briefly described as to whether it is growth, income, opportunistic, active, passive, or whatever was in fashion that year. Here’s where you make a big decision to include or exclude this fund based upon a single ingredient -- much like you would exclude wheat products if you were on a gluten free diet. Is this the right type of investment for your goals?
Under the heading Morningstar Category there is a brief description of the investment style of the fund. Here you will find an assessment of the manager’s investment goals. A passive index fund seeks to track an index of stocks or bonds. An active fund utilizes a manager’s expertise to choose investments that will perform well. A blended fund uses a combination of these strategies. Alternatively a target date fund chooses investments which are designed to grow in value over time but have less volatility and more safety as you approach a target retirement date. The style is also graphically represented on the right side of the page.
Pay close attention to the Volatility and Risk section of the report. Here a bar graph gives you a visual representation of the price volatility of the fund and a description of its historic performance. The return over the best and worst three month period and the dates of those periods is noted. Most recently the stock market had a very bad period in 2008. Can you live with a similar loss in your investment? This is where you decide if you are taking enough risk and if you can live with an unfavorable outcome.
The Performance of the Fund is graphically represented in a bar chart on the top right side of the page. Here your fund is compared against its benchmark and against its peers. Over short and long time periods, how does your fund stack up? You want a fund that outperforms its benchmark and its peers. This is a reflection of your fund manager’s skill level and consistency. Just how good and reliable are his returns versus a similar competitor?
Finally the Portfolio Analysis section gives you a brief overview of the investments in the fund. Just what sectors of the economy does it invest in and what companies does its own? These are the top holdings in the portfolio and give you an idea of the types of investments that the manager buys. Most people are okay giving the manager a broad scope for his investments, but if you dislike a particular sector of the economy, them maybe you should research other choices like ethically directed or environmentally sensitive funds.
So how are you doing?
In about the same time it takes you to read the nutritional information on a cereal box, you can check out your mutual fund investment. Check to see if you are buying what you thought you were buying and to reassess if different choices need to be made. It's all about making your money work for you -- so how's yours doing?