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(CNN Money) By Walter Updegrave - I'm 31 and dissatisfied with the funds I now own in my 401(k). So I want to shift my money to different funds within the plan. When making this decision, which do you think I should focus on more: the funds' expenses or the returns the funds have earned? - C.H.
Clearly, no single metric is going to tell you all you need to evaluate a fund. But given the choice you've posed, I'd definitely put more emphasis on the fees a fund charges than the returns it's earned.
Why?
Well, for one thing returns alone are tough to evaluate. They can be up big time in some years, way down in others and flat in still other periods. But that probably has more to do with changing market conditions than a manager's skill or lack of it.
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And even if you see a fund with attractive returns relative to its peers, that doesn't necessarily mean the manager is some sort of wiz kid. It could just reflect the fact that the manager is focusing on a narrower selection of companies than other funds in the same investment category and that niche happens to be doing well. Or maybe instead of adhering strictly to the fund's stated strategy, the manager is straying a bit to juice returns, say, moving into mid- or small-caps when the fund's true mandate is large companies. Or it could it be that the manager is just taking a lot more risk in pursuit of loftier gains.
Trouble is, that while all these strategies can generate stellar performance, they can also backfire, leading to lackluster returns or losses.
Fees, on the other hand, tend to persist. If a fund has fat expenses today, it's unlikely the charges will slim down in the future. And funds that take a more skinflint approach on fees tend to stay that way. So I think you can count on fees more than returns.
Read full story at CNN Money...
