The always informative Chuck Jaffe provided readers with a six-step guide to picking a mutual fund. His six steps are determine why you need a new fund, figure out which asset class you want, learn "the story" of the fund and manager, examine peers and check returns, get independent research and read the prospectuses, and then write the check.
If you are going to pick a fund, Jaffe's advice is sage. But rather than a six-step guide to picking a mutual fund, a lot of investors need a 12-step program to stop picking managed mutual funds. You will pay higher fees and you are unlikely to beat the market.
My concern with Jaffe's piece is that he writes that "For tie-breakers, I compare expense ratios and turnover (the lower the better on both fronts), tax-efficiency (unless the fund is in an IRA), and overlap with my current holdings."
But haven't expense ratios been the strongest predictor of a mutual fund's performance? We've seen that chasing performance can often lead to inferior returns, and managed funds typically lack tax-efficiency and suffer from high turnover.
I think the best bet for mutual funds is to go with index funds from Vanguard or a similar company. It's a lot less work, and you'll probably do just as well if not better.
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