Kernels of Korn

Wow! We’ve had the seminar!!! All of you who came are now feelin like Financial Guru’s! However, we promised a couple of month’s ago that we would write about LOWERING RISKS when buying Mutual Funds so we better get on with it! Some of this “risk” material is actually from our course. In fact, if you missed Ole Ricky and his wonderful, awesome, Chock full of Korn, seminar, send along a self addressed 9x12 envelope with $1.21 in postage and I’ll send you a copy, (till they run out) of the course’s workbook—you’ll be glad you did.

Mutual Funds can be purchased to basically match any individual investing style or criteria. If you stick only with Bonds, buy a Bond Mutual Fund. Not a lot of risk if held for lengthy periods of time. There is even mutual funds that cater to those who only prefer to buy Municipal Bonds.

When reviewing risk factors in Mutual Equity Fund Selections, look at Index Mutual Funds (and there are hundreds of index funds) as these are among the least volatile and as such perhaps, the least risky. These funds, generally are tailored to track or match the various stock market index indicators. Standard and Poor’s---Wilshire 1000--- Dow Jones etc. In essence, these funds generally go up and down with the overall index that they are trying to track.

Other risk indicators are shown in various analysis generated by Schwab, Morningstar and other services. Look for a risk indicator chart or graphic. Morningstar uses the famous 5 Star method, with a 5 star fund being the best!! Morningstar’s star ratings measure past performance combined with risk but even Morningstar admits that they are not meant to predict future performance.

You can also look for the Sharpe Ratio which compares the fund’s returns with the risk it takes. The higher the number the better. Anything higher than 1 is good because it means that the fund has lower risks than expected, giving the returns that it has generated.

The Alpha rating is another numerical score you can use. Alpha relates to the fund’s return that is independent of the market. A fund’s return goes up not just because of market but because of other fund internal matters—dividends, ability to separate itself from the market in general, etc.

Again, the higher numbers are better. Note, here that most of the fund research centers will allow you to input your “investment criteria” and then will perform a search to see if there are any funds that match your investment limitations. So if you enter a low risk tolerance the listings provided will hopefully list lower risk funds. Is it fool proof? No!

When you do find a list of funds, categorize them and keep the list handy so that you can also ask the research site to list more detailed information about each fund.

When you’ve selected an individual fund, Schwab’s Research screens will also list 2 or 3 funds that are similar  to the selected fund. This may allow you to expand your research to a few funds that the original search engine didn’t include. In this expanded research, keep track of the risk ratings—stars, graphs or charts.

I also think you can track a fund’s manager to assess potential risk. Has the manager been there a long time? Is the fund actually named for the manager? Yes answers to both of these questions would provide me with a positive insight to the potential risks inherent in this fund.

An article in our local newspaper, News Sun-Sentinel, May 7, 2000 that was written by one of my Financial Hero’s, Humberto Cruz, outlines the use of three financial advising internet sites.

Humberto says “fund advisor (www.americancentury.com)  is as sophisticated an online financial planning tool for individual investors as I have found. Based on the information you enter, it recommends a portfolio of mutual funds without favoring preference to its own.”  Humberto goes on to say “I tried Fund Advisor and liked it a bit better than two other online planners that have received extensive coverage and lavish praise in the financial media, Financial Engines (www.financialengines.com and DirectAdvice.com (www.directadvice.com)

Now all three of these services basically work the same and have the same ultimate goal. You enter a lot of information and the program then looks through all of the mutual funds in its database and recommends a list for you to invest in or do further research in. Each service has it’s own style and characteristics so it might be fun and informative to run through  all three. Now, remember that we talking all about estimates, recommendations and limited advice based upon a series of questions. In other words, input your own knowledge and risk factors.

                                                           

Now, if you’re still wanting to take more of a serious look at the risks involved, try www.riskgrades.com to see where your fund ranks within this services risk grading scale. This service is built on the concept that any assets riskiness, of price and volatility, can be measured against a basket of standard widely diversified stocks.  The grading scheme is explained, in a 61 page document but frankly, no way do I understand it!! It’s just another way to see where a particular stock or fund ranks with other assets in your portfolio.

Remember, there is not an investment that is risk free!! Look at the scale above, if the returns are high the risk is most likely to be high.

Recall, also, that CD’s have the risk of losing purchasing power to inflation!

 

Have any questions? Need some specific help, send me an E-Mails so that I can develop some columns that are suited to the needs of you and  your mutual church members! No question is dumb unless it remains unasked!

Rick Kornmeier  

           661 Tallavana Trail
            Havana, FL 32333

CMM@BIBLICALSTEWARDSHIP.COM