6 Ways to Decide Which Mutual Fund is Right for You

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By Tom Halloran

When it comes to making investment decisions and preparing for retirement, many investors fall prey to snap judgments based on a mutual fund's star rating or simply become overwhelmed by information overload. The good news is that there is a middle ground that can help you navigate your options and make informed decisions. The following six considerations -- all of which can be easily found on a Morningstar (MORN) fund report, can help you assess your investment options.

1. Read up on your funds' portfolio managers. The captain of a ship controls the fate of passengers just as a portfolio manager of a mutual fund is in control of the individual investor's financial journey. Therefore, it is important to review the manager's tenure and the performance of the fund since they've been the "captain" of the portfolio. If performance has steadily improved or declined over the course of their tenure, that may tell you something important.

With a bit of digging, you'll find details on a fund manager's experiences and background that can be telling. If the manager has overseen the fund for less than two years, I like to look into their prior experience managing money in the same investment category (for example, large cap, small cap, bonds, real estate investment trusts) as well as past investment performance. If they were successful in a similar category, it should give you confidence that they have the experience necessary to "steer the ship" on the fund they currently manage.

2. Understand the asset allocation of your investments. You should understand your portfolio's asset allocation (stocks, bonds or cash) for each fund in your portfolio. In both good and bad market conditions, portfolios can drift into more aggressive allocations than previously established when you first began investing. The key is to have a mix of stocks, bonds and cash within a portfolio that matches your risk profile/tolerance, financial goals and time horizon.

3. Look at a fund's top holdings. The top holdings can be a great barometer for how the fund will perform in different market scenarios. For example, you may notice that a particular fund has several technology stocks within its top 10 holdings. In a market where technology stocks are showing strong performance, your fund is allocated to perform similarly. Unfortunately, it can also have the opposite effect. If technology stocks "trade in the red" even on an up-day in the market, you could see your holdings in the fund perform flat-to-down for that session.

4. Dig into new holdings and largest position changes. Exploring a fund's new holdings and largest position changes will illuminate the number of shares that have been added or subtracted since they were last reported (typically every three to four months). Based on that information, you'll better understand how the fund manager is investing new cash into the fund. Finally, you might even want to put a few of these companies on your personal "watch list" to follow in the event you decide to buy an individual security as well.

5. Assess your portfolio's expenses in relation to its returns. All too often, investors will look at total return and not understand the relationship of the fund's fee to that return. For example, you may have a fund with above-average expenses that is delivering strong returns, while a low-cost fund may be underperforming. Also make sure to review specific fund information to determine how the fee level of each fund stacks up against its peer group.

This will ensure that you aren't overpaying for below-average performance, as there is a balance to consider between expense and results. The lowest-cost funds are by no means the best performers just as the most-expensive funds aren't necessarily the worst performers. It's about results that translate to growth within the parameters of your goals and time horizon. Also remember that it's about overall value for your entire portfolio, not only for a single fund.

6. Know the turnover ratio on a fund. This ratio is important as it allows you to see how often the portfolio manager changes holdings within the fund. A high turnover ratio isn't necessarily a bad thing, as some managers do trade more than their peers and market conditions may dictate more trading at times. There are near-term potential downsides of high turnover ratios: They may increase the likelihood of potential capital gains distributions and also, trading costs come at an expense.

Most managers are focused less on investing for tax efficiency, and more on maximizing the fund's total return. Although it might be disappointing to pay taxes on capital gains outside of your tax-deferred accounts (individual retirement account, 401(k), etc.), having more money is a nice problem for any investor. That said, if capital gains are a significant sore point for you, explore funds that focus specifically on tax efficiency. They are out there.

It may be tempting to judge an investment opportunity by its Morningstar rating alone for simplicity's sake, but there are other key indicators of a fund's potential success that can help lead you to a more secure retirement. By keeping these six ideas in mind, you can better dissect your investments, looking inside the numbers and beyond the star rating.

Tom Halloran is president of Voya Financial's closely aligned broker-dealer, with over 2,400 registered representatives who provide education, financial planning and a broad range of personalized asset accumulation, protection and distribution solutions to advance the retirement readiness of Americans.

10 Cities Your Financial Adviser Is Begging You Not To Retire To
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6 Ways to Decide Which Mutual Fund is Right for You
  • Cost of living -- 114.1
  • State tax burden -- 8.4 percent
  • Median house price -- $377,625, per Zillow.com
  • Climate -- 69/39 January, 105/75 July
  • Traffic congestion -- Didn't make the Forbes list
Scottsdale is a retirement mecca, with a reasonable cost of living, state and local taxes well below the national average, a great quality of life and plenty of amenities. But housing costs are nearly double the national average. Winters are warm, but summers are sizzling hot. Peak temperatures can reach close to 120 degrees -- after all, it's in the desert. The locals will dismiss it as "dry heat," but that kind of heat will still send your electric bill for air conditioning soaring, and can necessitate you buying new cars more frequently than you'd like.
  • Cost of living -- 130.0
  • State tax burden -- 9.3 percent
  • Median house price -- $417,600, per Zillow.com
  • Climate -- 74/64 January, 89/80 July
  • Traffic congestion -- Didn't make the Forbes list

Key West offers Caribbean weather in the U.S., an attribute that makes it a natural choice for retirees. And who could resist the Jimmy Buffett-Parrot Head thing, especially once you're living a life of leisure? 

You might be better off if you resist. The cost of living is 30 percent higher than the U.S. average, and housing costs at least twice as much. Travel is another issue. Key West is the most remote location in the continental U.S. The only road off the 6-square-mile island is the Overseas Highway, a 127.5-mile causeway that is largely one lane in each direction.

Hurricanes -- all too common in Florida -- are rare in Key West  -- though Wilma did hit it in 2005. But when they do impact the island, though, it's worth noting that the city has the Atlantic Ocean on one side and the Gulf of Mexico on the other, and there's no part of it that's more than 18 feet above sea level. So homeowners must pay several thousand dollars a year for hurricane insurance.

  • Cost of living -- 132.3
  • State tax burden -- 11.2 percent
  • Median house price -- $482,000
  • Climate -- 66/50 January, 77/67 August
  • Traffic congestion -- Didn't make the Forbes list
As big California cities go, San Diego is a bargain. But compared to the rest of the country, San Diego is certified high-cost. Yes, the weather is near perfect year-round. But the cost of living is one-third higher than the rest of the country, and house prices are nearly 2½ times the national average. Add in California's high state and local tax rates and the earthquake issue, and San Diego should be crossed off your list of potential retirement cities.
  • Cost of living -- 165.7
  • State tax burden -- 10.2 percent
  • Median house price -- $680,000
  • Climate -- 80/66 January, 88/75 July
  • Traffic congestion -- Second worst gridlock in U.S.
Can you imagine a more idyllic place to retire than Honolulu? Probably not. But as beautiful as it is, it shares many of the financial strains common to other cities on this list, plus a few more.

The overall cost of living is second only to New York City. After all, most of the goods people need have to be shipped across thousands of miles of ocean. The state tax burden is only slightly higher than the national average, but the median house price is triple the national average.

Finally, as far as cost of living is concerned, Honolulu has an unusual financial issue: travel expenses. Sooner or later, you'll want to get away from Hawaii. And there's no cheap way to escape from this paradise.
  • Cost of living -- 164.0
  • State tax burden -- 11.2 percent
  • Median house price -- $860,000
  • Climate -- 57/46 January, 70/55 September
  • Traffic congestion -- Third worst gridlock in U.S.
San Francisco frequently makes those "favorite cities in America" lists and for good reason. Situated on a peninsula between the Pacific Ocean and the San Francisco Bay, it is one of the most scenic cities in the world. Mild weather year-round, world class cuisine, charming neighborhoods and an eclectic population make it one of the most desirable places to live anywhere in the world.

But it has the highest median house prices in the country, which should scare off retirees. Its cost of living trails only New York City and Honolulu. And like the rest of California, its state and local tax burden is second only to New York.

One other reason people might avoid living in San Francisco is that it's prone to earthquakes. While that's certainly a concern for personal safety, few people from non-earthquake prone areas realize how it increases your cost of living. Homeowners need to pay several thousand dollars per year for earthquake insurance.
  • Cost of living -- 140.1
  • State/district tax burden -- 4.0 percent on first $10,000 and up to 8.95 percent on income greater than $350,000 in D.C., 10.2 percent in Maryland, 9.3 percent in Virginia
  • Median house price -- $395,000
  • Climate -- 43/29 January, 88/71 July
  • Traffic congestion -- 10th worst gridlock in U.S.
Washington is centrally located, is filled with historic attractions and has some of the most beautiful neighborhoods in the country. It also has one of the highest effective local income tax rates in the country. The district taxes the first $10,000 of income at 4 percent, then 6 percent to $40,000, then 8.5 percent on all income over $40,000 (you can exempt up to $3,000 in retirement income).

Like other cities on this list, Washington sports a high cost of living and some of the highest housing prices in the country. The area also has its share of toll roads, and traffic is a recurring problem. This is especially troublesome during the holidays and summer months. Interstate 95 -- which bisects the metro area -- is the principal travel corridor between the Northeast and Florida. Making traffic matters worse: the near-permanent road construction projects.
  • Cost of living -- 136.4
  • State tax burden -- 11.2 percent
  • Median house price -- $456,000
  • Climate -- 68/48 January, 83/64 July
  • Traffic congestion -- Worst gridlock in U.S.
As recently as the 1970s, Los Angeles was widely viewed as the city that all America was looking to move to -- or at least to imitate. Perfect weather, endless beaches, palm tree-lined streets, plentiful housing, a powerhouse economy and the lure of rubbing elbows with a celebrity or two. Today, about the only things L.A. has going for it are near-perfect weather and In-N-Out Burger. The rest is mostly a faded memory. The city's success was, in fact, a key contributor to its decline: The near-doubling of the metro population since the 1970s has created East Coast levels of human congestion.

Property values are higher than New York's and nearly twice those of Chicago. The state and local tax burden in California is second only to New York, and the overall cost of living in L.A. is more than one-third higher than the national average. California's unfunded pension liabilities are nearly as high as those in Illinois, threatening serious tax increases that could squeeze retirees. Nagging quality of life issues include the worst traffic congestion in the nation and smog that could lead to higher medical costs.
  • Cost of living -- 132.5
  • State tax burden -- 10.4 percent
  • Median house price -- $370,000
  • Climate -- 36/22 January, 81/65 July
  • Traffic congestion -- Ninth worst gridlock in U.S.
Boston is the quaintest large city in America, sporting centuries-old but impeccably maintained architecture, neighborhoods and surrounding communities that just ooze with charm and close access to the beaches of Cape Cod and the mountains of Vermont and New Hampshire. If Boston were a less expensive place to live, it could well be an popular and smart retirement destination.

But it isn't. The high cost of living and high housing prices are the main reasons cited by former residents for leaving the state. The state tax burden is higher than the national average; the cost of living is about one-third higher than the national average; and house prices are nearly double the U.S. median. Translation: a large chunk of your retirement income would be spent just covering basic living expenses.
  • Cost of living -- 116.9
  • State tax burden - 10.2 percent
  • Median house price -- $247,000
  • Climate -- 32/18 January, 84/68 July
  • Traffic congestion -- Didn't make the Forbes list
Based on the numbers, Chicago wouldn't seem to be the retirement financial disaster that other cities on this list are. The state tax burden is only slightly higher than the national average; the cost of living is tolerably higher than the U.S. average; and house prices -- while higher than the nation in general -- are downright affordable compared to the coastal cities.

However, in addition to being a generally more expensive place to live than the nation at large, the area faces burgeoning problems just over the horizon. Illinois faces the highest unfunded pension obligations of any other state in the country, at around $100 billion. Chicago faces a nation-leading $20 billion unfunded pension liability. Such deficits scream out for higher taxes across the board. We can only speculate as to which taxes will be raised (or created).
  • Cost of living -- 216.7 Manhattan, 145.7 Nassau County
  • State tax burden -- 12.8 percent
  • Median house price -- $972,000 Manhattan, $440,000 Nassau County
  • Climate -- 38/27 January, 84/69 July
  • Traffic congestion -- Fifth worst gridlock in U.S.
The area has fantastic amenities -– theater, music, concerts, festivals, ethnic foods, diverse and quaint neighborhoods and close access to beaches and mountains. It also has probably the most comprehensive public transportation system in the U.S. But it breaks down spectacularly when it comes to the costs. The area has close to the highest cost of living in the country, which gets markedly worse the closer you are to Manhattan. House prices are out of sight, particularly in the more desirable communities and neighborhoods. New York State has the highest state and local tax burden in the country. New Jersey has the highest real estate tax burden in the country. And nearby Connecticut isn't much better.

Weather runs from winter-time deep freezes to protracted summer heat waves. The preponderance of bridges, tunnels and their tolls -- as well as antiquated roads running through quaint town centers -- makes congestion a constant problem, even on the weekends.
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