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Chapter 12. Looking for Mr. Goodfund > Investment Options at a Glance - Pg. 121

Looking for Mr. Goodfund 121 For What It's Worth Is size important? Funds with less than $50 million to invest may be tough to diversify enough to avert big market swings. If money is concentrated in a few big institutional investors' accounts, the fund might have to sell shares to pay them if they drop out. On the other hand, too big can be bad. When certain funds get too big, they can drag down performance. Take a small-company stock fund that brings in billions of dollars of investors' money. How many small companies must the fund invest in to use all that cash? Remember that a stock fund must stay invested in the stock market all the time. If you park too much in cash, you lose! Now let's look at how to go about evaluating the real, live funds that constitute a fictitious 401(k) plan. Our investment options at a glance pages were put together using some readily available sources of information. We used the fund's prospectus (or trust agreement), one-page fund fact sheets, and Morningstar Reports . All of this information is available through either your plan ad- ministrator, the fund company, or your local library. To really cut down on your search time, try the individual fund family's Internet address. We have reviewed three of the nine funds and provide our commentary later. This commentary should give you a good idea of what to look for when you review the funds in your 401(k) plan. What Is Morningstar? First, we should tell you a little more about Morningstar, as we promised earlier. After all, if you're going to trust a source of information, you should know all about it. Morningstar is kind of like the Consumer Reports of the mutual fund business. There are other firms --Lipper, Value Line, Weisenberger, and many other fine firms--that perform similar services. Plus, you can refer to magazines like Business Week , Kiplinger's , Worth , and Money magazine to check out their opinions on your funds as well. Morningstar is easily accessible to the average investor through local libraries and over the Internet ( As one of the first firms to perform a variety of statistical analyses on mutual funds, Morningstar is best known for its "risk-adjusted rating" system. Beyond looking at a fund's 3-, 5-, and 10-year performance records, Morningstar looks at the amount of "risk" that the manager takes to get a certain level of return. After all, investors should know whether a manager has "bet the farm" with their money. Morningstar analyzes where and how managers invest your money and then compares these results with the returns on 90-day Treasury bills. They roll all this information into a "bell curve" system rating the funds: · · · · · 10 percent get five stars 22.5 percent get four stars 35 percent get three stars 22.5 percent get two stars 10 percent get one star