Morningstar Guide to Mutual Funds: Five-Star Strategies for Success (Morningstar Guide to Mutual Funds)

GUIDE TO MUTUAL FUNDS SECOND EDITION ''Picking actively managed mutual funds is no mean challenge. And as the recent era underscores, past performance is of little help. The Morningstar Guide to Mutual Funds helps cut through the fog with a solid volume of constructive information. The central message--'truly diversify, keep it simple, focus on costs, and stick with it'--is not only timeless, it is priceless.'' --John C. Bogle, founder and former CEO, The Vanguard Group ''Successful investors know they must do their own due diligence. Morningstar has done much of that homework in this guide. Leave it to Morningstar to get it right, offering smart ways to pick, build and monitor a portfolio. It's a commonsense guide that should grace every investor's shelf.'' --Ted David, CNBC Anchor ''There's nothing Morningstar doesn't know about mutual funds. And at last, for ready reference, there's a book. You'll find everything here you need to know about managing fund investments, inside or outside a 401(k).'' --Jane Bryant Quinn, Newsweek columnist and author of Making the Most of Your Money Morningstar Guide to Mutual Funds, Second Edition......Page 3 Contents......Page 5 Foreword......Page 7 Acknowledgments......Page 11 Introduction......Page 13 Part I: How to Pick Mutual Funds......Page 17 Know What Your Fund Owns......Page 19 Style Box TM......Page 21 Using the Stock-Fund Style Box......Page 22 Using the Bond-Fund Style Box......Page 24 Using Morningstar’s Category System......Page 26 Examining Sector Weightings......Page 29 Examining Number of Holdings......Page 30 Checking Up on Trading Behavior......Page 31 Investor’s Checklist: Know What Your Funds Own......Page 33 Understanding Total Return......Page 34 Using Indexes as Benchmarks......Page 36 Using Peer Groups as Benchmarks......Page 39 Focusing on Long-Term Returns......Page 40 Checking Up on Aftertax Returns......Page 41 Investor’s Checklist: Put Performance in Perspective......Page 42 Understand the Risks......Page 43 Evaluating Investment-Style Risk......Page 44 Evaluating Individual-Company Risk......Page 46 Doing the Gut Check......Page 47 Using Standard Deviation......Page 48 Using Morningstar’s Risk Rating......Page 50 Using the Morningstar Rating ( The Star Rating)......Page 51 Investor’s Checklist: Understand the Risks......Page 54 Get to Know Your Fund Manager......Page 55 Understanding Types of Fund Management......Page 57 Evaluating Quality and Quantity of Experience......Page 58 Assessing the Firm’s Resources......Page 59 Assessing Shareholder Friendliness......Page 60 Finding the Right Fund Companies for You......Page 63 Investor’s Checklist: Get to Know Your Fund Manager......Page 82 Keep a Lid on Costs......Page 84 Avoiding the Rearview Mirror Trap......Page 85 Comparing Expense Ratios......Page 88 Understanding Sales Charges......Page 89 Paying Attention to Hidden Costs......Page 92 Minding Tax Efficiency......Page 93 Investor’s Checklist: Keep a Lid on Costs......Page 96 Part II: How to Find Ideas for Your Portfolio......Page 97 Find the Right Core Stock Funds for You......Page 99 Understanding Value Funds......Page 100 Understanding Relative-Value Funds......Page 102 Understanding Absolute-Value Funds......Page 105 Understanding Income-Oriented Value Funds......Page 106 Knowing When Value Investing Works......Page 107 Understanding Earnings-Driven Funds......Page 109 Understanding Revenue-Driven Funds......Page 111 Understanding Blue-Chip Growth Funds......Page 112 Understanding Blend Funds......Page 113 Deciding between Style-Specific and Flexible Funds......Page 118 Deciding Between Active and Passively Managed Funds......Page 119 Using Exchange-Traded Funds As an Index Fund Alternative......Page 125 Using Foreign Funds in a Portfolio......Page 129 Using Small-Cap Funds in a Portfolio......Page 139 Using Sector Funds Wisely ( Or Not at All)......Page 142 Using Real-Estate Funds in a Portfolio......Page 146 Using Commodity Funds in a Portfolio......Page 147 Investor’s Checklist: Move Beyond the Core: Using Specialized Stock Funds......Page 148 Find the Right Core Bond Fund for You......Page 150 Understanding Interest-Rate Risk......Page 151 Understanding Credit-Quality Risk......Page 152 Buying Core Bond Funds......Page 154 Determining if Municipal Bond Funds Are Right for You......Page 158 Investor’s Checklist: Find the Right Core Bond for You......Page 163 Using High-Yield Bond Funds......Page 164 Using Ultrashort Bond Funds......Page 166 Using Inflation-Indexed Bond Funds......Page 167 Using Bank-Loan Funds......Page 168 Using World Bond Funds......Page 170 Using Emerging-Markets Bond Funds......Page 171 Using Multisector-Bond Funds......Page 172 Investor’s Checklist: Move Beyond the Core: Using Specialized Bond Funds......Page 173 Part III: How to Build a Portfolio......Page 175 Match Your Portfolio to Your Goals......Page 177 Taking Stock of Your Goals and Time Horizon......Page 178 Projecting Rates of Return......Page 179 Assessing Your Savings Rate......Page 180 Making Up for Shortfalls......Page 181 Avoiding the Market-Timing Trap......Page 182 Investor’s Checklist: Match Your Portfolio to Your Goals......Page 184 Put Your Portfolio Plan into Action......Page 185 Making Room for Noncore Holdings......Page 186 Building Portfolios for Short-Term Goals......Page 188 Building Portfolios for Long-Term Goals......Page 190 Knowing How Many Funds Are Enough......Page 193 Avoiding Overlap......Page 194 Investor’s Checklist: Put Your Portfolio Plan into Action......Page 197 Simplify Your Investment Life......Page 198 Investigating One-Stop Funds......Page 199 Taking the Best and Leaving the Rest......Page 202 Consolidating Your Investments with a Single Firm or Supermarket......Page 203 Putting Your Investments on Autopilot......Page 204 Investor’s Checklist: Simplify Your Investment Life......Page 205 Be Savvy When Seeking Advice......Page 207 Understand the Different Types of Advice......Page 208 Understand the Costs......Page 209 Weigh the Intangibles......Page 210 Investor’s Checklist: Be Savvy When Seeking Advice......Page 211 Part IV: How to Monitor Your Portfolio......Page 213 Schedule Regular Checkups......Page 215 Conducting a Quarterly Portfolio Review......Page 216 Conducting an Annual Portfolio Review......Page 217 Rebalancing......Page 220 Investor’s Checklist: Schedule Regular Checkups......Page 221 Know When to Sell......Page 223 Evaluating Performance Weakness......Page 224 Knowing What to Make of Manager Changes......Page 225 Assessing Strategy Changes......Page 226 Evaluating Regulatory Problems......Page 227 Monitoring Rising Expense Ratios......Page 229 Keeping an Eye on Asset Growth......Page 230 Evaluating Your Own Needs......Page 231 Evaluating Your Tax Situation......Page 232 Investor’s Checklist: Know When to Sell......Page 233 Keep a Cool Head in Turbulent Markets......Page 234 Investing in Bear Markets......Page 235 Investing in Bull Markets......Page 240 Investing During Inflationary Periods......Page 241 Investor’s Checklist: Keep a Cool Head in Turbulent Markets......Page 242 Important Things to Remember When Using the Rating......Page 249 Part V: More on Mutual Funds: Frequently Asked Questions......Page 245 1. How Does the Morningstar Rating for Mutual Funds Work?......Page 247 2. What Should I Do When My Fund Loses a Star?......Page 250 3. How Does Morningstar’s Style Box Work?......Page 252 4. How Do I Buy My First Fund?......Page 255 5. What Should I Do When My Fund Manager Leaves?......Page 259 6. Should I Buy a Rookie Fund?......Page 261 7. Should I Buy a Fund That’s Closing?......Page 263 8. Should I Buy a Fund That’s Doing Really Well?......Page 266 9. Should I Buy a Fund That’s in the Dumps?......Page 269 10. What Should I Do If My Fund Owns a Stock That Creates Headlines?......Page 271 11. How Can I Pay Less in Taxes?......Page 273 12. How Can I Determine Whether a Fund Is Best for a Taxable Account or a Tax-Sheltered Account?......Page 276 13. How Can I Find the Best Fund Supermarket?......Page 278 14. How Do I Read a Fund’s Prospectus?......Page 281 15. What Do I Need to Know About the Statement of Additional Information?......Page 285 16. How Do I Read a Fund’s Shareholder Report?......Page 287 Recommended Reading......Page 293 Other Morningstar Resources......Page 297 Index......Page 299

praise For Morningstar

guide To Mutual Funds

second Edition

picking Actively Managed Mutual Funds Is No Mean Challenge. And As The Recent Era Underscores, Past Performance Is Of Little Help. The Morningstar® Guide To Mutual Funds Helps Cut Through The Fog With A Solid Volume Of Constructive Information. The Central Message—'truly Diversify, Keep It Simple, Focus On Costs, And Stick With It'—is Not Only Timeless, It Is Priceless.

—john C. Bogle, Founder And Former Ceo, The Vanguard Group

successful Investors Know They Must Do Their Own Due Diligence. Morningstar Has Done Much Of That Homework In This Guide. Leave It To Morningstar To Get It Right, Offering Smart Ways To Pick, Build, And Monitor A Portfolio. It's A Commonsense Guide That Should Grace Every Investor's Shelf.

—ted David, Senior Anchor For Cnbc Business Radio

there's Nothing Morningstar Doesn't Know About Mutual Funds. And At Last, For Ready Reference, There's A Book. You'll Find Everything Here You Need To Know About Managing Fund Investments, Inside Or Outside A 401(k).

—jane Bryant Quinn, Newsweek Columnist And Author Of Making The Most Of Your Money

Since the publication of the original Morningstar Guide to Mutual Funds, a national bestseller, the world of investing has become more complicated and investors have become more sophisticated. With so many changes in this arena, people are now looking for much more than a simple introduction to mutual funds. Quality mutual fund guidance from a leader in the fieldSince the publication of the original Morningstar Guide to Mutual Funds, a national bestseller, the world of investing has become more complicated and investors have become more sophisticated Presents anecdotes and financial information that can be used to build and maintain a profitable mutual fund portfolio, explaining what mutual funds are, how they should be used, and what their advantages and disadvantages are