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How to Put Mutual Fund Training into Practice
The vast majority of brokers select mutual funds solely based on performance. Whenever astock or bond fund is needed, the solution is simple: look for something with a top-performing track record—preferable something highly rated by Morningstar or Lipper. Thecorrect way to pick a fund is much more complex.
Mutual fund training
provides theinformation the advisor needs.
Avoiding The Fund of the Month
By taking the proper steps when selecting funds, advisors are not reduced to “the flavor of the month.” The situation wherein a client asks the broker why he is not in the ABCAggressive Growth Fund that was up 78% last year (or some other fund written up in thefinancial press) is also properly handled. Next time someone wants to go into a hot fund,simply ask, “What is the fund’s risk level.” If the client doesn’t care about risk, tell her thatyou can double their money in a day—by going to Las Vegas and betting it all on red.Mutual fund courses teach the broker ways to deal with any question or concern raised.
Enter Modern Portfolio Theory
The use of modern portfolio theory (MPT) makes fund selection and portfolio constructionsomething that is based on risk-adjusted returns and the historical relationship betweendifferent asset categories. An objective of MPT is to find categories that have demonstratedattractive track records with a risk level acceptable to the client. Another goal is to have aportfolio comprised of assets that do not move up and down at the same time; the idealportfolio should include investments that have low, random or negative correlations toothers. This way, when some assets are dropping, other investments may be flat or evengoing up in value.MPT is an important tool for the broker because it represents the closest thing to makinginvestment decisions somewhat of a science instead the luck of the draw. Everyone can dowell when markets are going up. It is during those times when markets are flat or fallingthat the advisor can make a real difference. Reducing losses increases the likelihood of client retention and more referrals in the future. Yet, few advisors or brokers take thisapproach. Most everyone has auto and homeowner’s insurance; few have portfolioprotection. Most mutual fund courses include a section on MPT. MPT is based on three parts: long-term historical returns, standard deviation and correlationcoefficients. Reviewing returns over a 15-20 year period ensure that a fund manager wasnot just lucky or that there was not a fluke economic period. Standard deviation showsinvestment volatility. The reality is that an asset that averaged 9% over the past 10-15
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