Look before you leap

The chart above is a little difficult to read but if you click on it it should enlarge.

Now, I like ETFs and I am not alone. That said, lots of folk are still buying mutual funds. To be honest, some mutual funds do just fine. One must do their homework and stay away from the funds that show signs of being dogs. For instance, with interest rates where they are I'd minimize my exposure to bonds. In the above chart, the bright purple line at the bottom is tracking a bond fund.

Is there anything positive one can say about such a flat line? Yes. It's flat. It shows minimal volatility. When equity based mutual funds are crashing, the bond funds hold their value. This lack of volatility is the reason many mutual funds contain bonds. The bonds in the fund prevent the fund from losing too much in a down market. Sadly, the bonds also limit the upside potential.

Historically, the U.S. market outperforms the Toronto Stock Exchange. The green line at the top of the chart tracks the performance of TDB3091 - a U.S. blue chip equity fund. It holds no bonds. Mutual funds that do exceedingly well in comparison to other funds often contain lots of exposure to U.S. equities and hold few, if any, bonds.

Doing better than the bonds but not as well as the U.S. based fund are a couple of Canadian funds: the Mackenzie Canadian Growth Fund and the Manulife Dividend Income Fund.

So, when investing in funds, check the holdings of the funds you are considering. A generous exposure to U.S. equities, a minimal exposure to bonds and a middling amount of exposure to Canadian high quality dividend stocks is my preferred mix.

One warning: A five star mutual fund bragging that it has done better than any other fund this year may well be a mutual fund to ignore. A solid four or five star fund is often a much better choice. Why? Funds rarely get to first place because of brilliance. The funds occupying the top rung are there because someone made a very bold and very lucky move. It is almost impossible to repeat such a feat two years in a row. It not uncommon for the year's best performing fund to get buried in the pack in the following year.