The Art of Choosing the Right Fund

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April 11, 2024

In this edition of Jake’s Take, Castlepoint Partners Jake Weatherford, CFP®, and Adam Lee, CFA®, discuss the critical task of selecting the appropriate fund for an investor’s needs. They emphasize the importance of fully understanding one’s investment strategy before selecting funds. Adam likens the process to choosing the right tools for building furniture, indicating that the funds should match the intended investment outcome. They further point out the significance of maintaining strategy consistency, the necessity of considering one’s existing portfolio, and the tax implications of fund choices. Ultimately, they argue the optimal fund choice hinges on the investor’s unique strategy requirements and objectives.

Video Transcript

Jake Weatherford:

Welcome back. Thanks for joining Adam and I here. We’re going to dive in a little bit to how do we choose the right fund. I’ve heard that from friends, I’ve heard that from clients, and I understand, but we got to make sure we’re asking the right questions. And so let’s first break that down to how do I choose the right fund in a certain market. So for example, Adam, how do you choose the right fund in the us? 

Adam Lee:

Yeah, it’s a good question and I always struggle with this one a little bit because my temptation is to reframe the question from the start, and so let me answer a different question. If you came to me and you said, Adam, I like to build stuff out of wood, I’m kind of into woodworking, and that’s kind of one of my nerdy time sinks at ho me. If you came to me and said, Hey, what’s the best tool for building a side table? I had immediately have to reframe it and say, well, I mean, it kind of depends. How do you want to build a side table? You could use a table saw and glue, and you could probably get by with just using those two tools. You could use probably like a circular saw and screws. You could use a hand saw and chisels and a nail gun. There’s all kinds of different ways to cut boards to length and fasten them together. Now, if you came to me and you were like, Hey, man, I’ve got these awesome tools. I’ve read reviews online. These are five out of five star tools. This is the best set of chisels and this is the best table saw, and this is the best circular saw out on the market. I would say, that’s great. These aren’t nice tools, but how are you going to get the thing to stick together? You’ve got a lot of ways to cut it, but you don’t have any way to actually make the thing stick together. And so the tools or the funds are only relevant in the context of what are you trying to achieve? What is your full plan to build an end table or build a portfolio? And so there are definitely bad tools out there, so you could get a really cheap saw with really dull teeth on it, and that’s kind of a bad tool no matter what your plan is. But then there’s really nice chisels, really nice table saws, other things that they’re all nice tools, but then they only, I can really only say whether they’re good tools or not in the context of the plan and what you’re trying to build. And so we actually have a slide here that shows this pretty well. I chose a fund, and we’re not recommending any of these funds to be clear, but just as an exercise, I chose a fund that has a broad US allocation with certain tells toward different sectors of the market. Then the next portfolio, I chose a combination of three funds that built up to pretty similar results overall. And then the next one, I think it’s six or seven funds, and you can see the lines on this graph almost overlap each other. And so my point here is if you ask me which one of these funds is a good fund and a bad fund, it’s really not. It’s really difficult to answer that. It’s what are you building with the funds? And I can tell you then, is this collection of funds consistent with and appropriate in terms of the tools you’re using to build towards your strategy? But the first thing you have to answer before you answer the question about funds is what is my strategy? And there’s different strategies, and I’d liken this to a basketball team. There’s definitely really stupid plays you could draw that would not work on any team in any situation, but you can have a championship team that runs different kinds of offenses. So there’s a collection of strategies that probably are better than other strategies. But then in that top tier, probably the more important thing than the strategy is everybody bought into the strategy? Are they practicing it? Are they executing on it consistently? So I would pick, in a lot of cases, I would rather see a strategy that I maybe only 95% agree with executed consistently and well over a 10 to 15 year stretch. Then a bunch of hopping between strategies that I 98% agree with because consistency is important. So that’s where I would start. The most important thing is the highest level. What’s your allocation between equities and bonds? We’ve talked about that before. Probably next is how consistent are you in executing a good strategy? And then next behind that is, which good strategy have you chosen to execute? And then behind that I would say, what tools do you use to execute on that strategy? And that’s not to say that we don’t in our interactions with people who are, our clients have preferences on the tools that we use, but it’s important not to get distracted with what table saw do I own? What chisels do I own? Before you have a plan in your mind with, okay, I want to build side table, I want to build a chair, and I have a complete compliment of tools that can accomplish that. 

Jake Weatherford:

You brought up two things in my mind when you were talking about what tools do I need to build that table? Well, the other thing is if you already have a table saw to cut the top with, but you don’t have something to do the fine details, well then that’s the best tool for you. That’s the best fund for you. But we have to know what you’re trying to build first. We have to know what you lack so that you know which fund best meets that need. That’s the problem with the question is what need are you trying to meet? The other thing that it made me think of is if you asked me what’s the best fund, well, I need to know what problem you’re trying to solve with it, what strategy are you trying to meet? Because I don’t even know if you need a stock fund or a bond fund if you don’t tell me what strategy you’re trying to meet. So from the top, you have to nail down and get more detailed to actually be able to answer that question. And to your basketball example to find out what player you need. Do you need a shooting guard or do you need somebody down on the post? Well, and then we can start to say, this one for that strategy is the best fund. That’s how you answer your question, what’s the strategy? Well, no problem. Here’s why that’s best, because this fund executes on that strategy the very best that we’ve found. 

Adam Lee:

Absolutely. And to beat the metaphor a little bit harder, sometimes we have clients that will come to us with a portfolio already made from another advisor, or potentially they’ve been doing it on their own. Sometimes that portfolio is in a taxable account where they may have large built-in gains. And my metaphor there is if you came to me and said, Hey, I have this table saw. Is this your favorite table saw at that price point? Maybe I’d say, no, I actually prefer this one. I think it’s slightly more accurate, but if you ask me, okay, should I give away this table saw and go spend $500,000 on this one that you prefer slightly more? I’d say, no, it’s not worth the cost to switch from what you have right now to this other thing. I’d rather get this other tool. Maybe it’s some kind of special fence or whatever that you put on the table saw to help you get more accurate with it versus throw the whole thing out, spend a bunch of money to design it from scratch to be perfect. We can build around different things. Back to the point about the graph we showed, there’s many different ways to accomplish broadly similar strategies. And so some of the more complex things we do is when clients do come to us with existing portfolios or legacy positions in a taxable account, it’s important that we build around them and we not just say like, well, I’m used to working with this fund, so I’m just going to sell everything. Give ’em a huge tax bill, and we’re just going to get into what I feel comfortable with. That’s not at all what we do typically on behalf of clients. It’s all about working towards a strategy, working with what you have, analyzing the cost benefit of each thing, and then in the context of a strategy of the existing positions, you can start to answer the question, okay, these are the tools at my disposal. Which tools do I think will be best? Now that I have all that other information, 

Jake Weatherford:

That’s right. What’s my strategy? What am I trying to build? What tools do I need to meet that specific part of my portfolio? Part of my strategy? That’s how we answered the question, what’s the best fund.

The content of this video is developed from sources believed to provide accurate information. The information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All expressions of opinion are subject to change. This content is distributed for informational purposes only, and is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio.

Castlepoint Wealth Advisors | Oklahoma Wealth Advisors | Jake Weatherford - Partner & Advisor

Jake Weatherford, CFP®, MBA

Partner & Advisor at Castlepoint Wealth Advisors

Jake Weatherford is a Partner and Senior Advisor for Castlepoint Wealth Advisors, an Independent Wealth Management firm in Oklahoma City. He is responsible for providing client investment advice and implementing the firm’s financial planning strategies. Jake is also responsible for portfolio modeling and financial projections, which help our clients evaluate potential outcomes of their decisions.

Read more Jake’s Take blog posts and articles.