What is the right way to select a fund for inclusion in a portfolio?

Like any fundamental question, it is easy to pose, but quite difficult to present a convincing answer that applies universally to all investors.

The global investment industry has grown rapidly over the past thirty-odd years, and over this time, the number of funds and other asset vehicles available for inclusion in the portfolios of typical individual investors has increased commensurately. Inevitably, the processes for developing and executing portfolio decisions have become ever more mechanized as financial institutions attempt to scale their operations to earn more profit from every dollar of business expenditure. As a result, the average investor, more often than not, is presented with a set of alternatives that do not take into account all the critical factors relevant to that specific investor. Purveyors of passive index funds or ETFs will claim that their offerings are universally superior in terms of value provided for fees charged when compared to needlessly expensive active funds. Active fund managers, on the other hand, will grab whatever data points (e.g. Morningstar’s “stars” ranking system) are available to support their case for offering outperformance relative to some benchmark. Sophisticated selling channels exist to mass-market the wares of various assets to “the investing public”, with claims that require a distinctive skill in reading round-about sentences in very small print to validate.

The problem with this system is it’s willful ignorance of one crucial fact – there is no such thing as a single “investing public”. Rather, there are highly unique individuals, households and institutions, all of whom have their own investment goals, levels of risk tolerance, and special circumstances like liquidity needs, time horizon considerations and tax issues. To say “this investment is right for you because its fees are the lowest in the industry”, or “go with ABC Fund because it has outperformed its benchmark for the last 3.6 years” is to ignore much of what is important for each individual putting his or her money to work for those unique goals. And that is to say nothing about the even more egregious, yet all too familiar, underlying motive of many financial institutions: “ABC Fund is right for you because Corporate wants to ramp up its assets under management to $500 million by the end of this quarter”.

The individuality of each investor’s needs is the driving force behind Jemstep’s approach to investment recommendations. Our system does not adhere to any rigid ideological view as to whether active or passive investment vehicles are “better”, nor does it defer to the primacy of some cookie-cutter ranking system. Rather, we take a large range of factors into account, each of which reflects the amount of importance each individual ascribes to that factor. In total, this amounts to over 70 data points in six categories including tax, fees, income, returns, time horizon, risk and manager tenure. In other words, we do not tell investors what should be important to them, but rather, we gather all the information about what is important to them, and based on that information, we provide a ranking of funds appropriate to their objectives.

Over the coming weeks, we will be sharing more of our thoughts with you on this important subject. And as Jemstep continues to grow and attract users, we will also be listening carefully to your feedback and making improvements and enhancements in the service of our one goal: helping individual investors make better investment decisions and achieve their financial goals faster.

What are your investment goals? Tell us what is important for your financial well-being.

For a free, easy and unbiased way to find the best investments for you, visit Jemstep.com.

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