529...411 part 2

I left off yesterday with a statement regarding mutual funds.

A mutual fund is simply a group of stocks or bonds. These can be grouped in many different ways. The reason that mutual funds are extremely popular is that the funds allow individuals with smaller amounts of invested cash to earn returns better than savings accounts and achieve diversification within their portfolio. Now, let me be very clear. Investing in a mutual fund will not always properly diversify your portfolio. But, that is a topic for another day.

So, how do you tell how good a mutual fund is? Well, there are a few key factors to look at. First, what is the Morningstar rating? Morningstar rates mutual funds with a star system of 1 to 5. The more stars the better. These ratings are based on past performance and updated on a monthly basis. The second key to look at is the mutual fund's performance as compared to the market. The fund performance figures are easy to locate on Yahoo Finance. I would then compare these figures against an index like the S &P 500 over the same period of time.

Lets take a look at one of the Vanguard funds that is available for the NC 529 plan with the College Foundation. The most aggressive Vanguard option is the Vanguard LifeStrategy Growth Fund. The College Foundation provides the performance numbers on their website. However, because these investment options are relatively new, they only provide performance figures for last year, and YTD. The Vanguard LifeStrategy Growth Fund was started on 3/3/08. Since that time, the fund as returned -7.55%. Not that good, but we have just come out of a very bad few years for the markets. That said, the most conservative fund has returned 5.98% since its inception.

What does this tell us? Simply that setting up your account and hoping for the best will not work. It is critical that you review your account and its performance two to four times each year so that you will not start going backwards.