Money Magazine Annual Mutual Fund Review

Money magazine has put up their annual mutual fund review.

It's not perfect, but the more information you have to compare investments the better. I'd like to see their "annualized returns" data corresponding to calendar years, and I'd like to see a 10 year annualized return.

The Largest Mutual Funds

Kiplinger's Personal Finance recently ran an article detailing the largest mutual funds in the U.S. market. This can be interesting information; some people recommend that you be cautious about investing in a fund that is too large. Some like a $20 billion limit, others like a $40 billion limit. Note - the limit would not apply to index mutual funds like Vanguard 500 or Vanguard Total International Stock Market.

Mutual fund -- Size -- Expense ratio

1. Vanguard 500 -- $117.7b -- 0.18%
2. Vanguard Total Stock Market Index -- $89.1b -- 0.19%
3. Fidelity Contrafund -- $68.8b -- 0.88%
4. Dodge and Cox Stock -- $64.8b -- 0.52%
5. Vanguard Windsor II -- $49.2b -- 0.35%
6. Fidelity Diversified International -- $45.8b -- 1.05%
7. Vanguard Wellington -- $44b -- 0.29%
8. Fidelity Magellan -- $45.4b -- 0.59%
9. Fidelity Low Priced Stock -- $39.8b -- 0.88%
10. Dodge and Cox International Stock -- $28.5b -- 0.67%
11. Vanguard Primecap -- $22.4b -- 0.46%
12. Fidelity Equity-Income -- $30.6b -- 0.67%
13. Fidelity Growth Company -- $29.2b -- 0.96%
14. Fidelity Growth and Income -- $30.6b -- 0.69%
15. Dodge and Cox Balanced -- $27.1b -- 0.53%
16. Fidelty Puritan -- $25.8b -- 0.62%
17. T. Rowe Price Equity Income -- $23.6b -- 0.71%
18. Fidelity Balanced -- $22.2 b -- 0.63%
19. Vanguard Total International Stock Index -- $19.1b -- 0.31%
20. Fidelity Blue Chip Growth -- $20.1b -- 0.63%

Sorry for the formatting - it's a Blogger feature.

New International Investing Options

Finally, there are a few new ways to invest outside the U.S. using indexed ETFs.

If you're looking to keep things simple by sticking to a foreign index AND using only a small number of investment vehicles, your options are few. I've used VGTSX, the Vanguard Total International Stock Index (which is simply a mix of 3 Vanguard index funds - a Europe fund, an Asia Pacific fund, and 5% or a bit more of their emerging markets fund) or the EFA ETF (Europe, Far East, and Australia), which has even less emerging markets exposure. By the way - both options have holes: Canada, for instance.

Let's compare and contrast 3 options:

VEU (Vanguard FTSE All World ex-U.S. ETF): This index ETF will cover everything outside the US, including emerging markets. It will have broader coverage than Vanguard's Total International Stock Index fund, which has over 2000 stocks. It will have a 0.25% expense ratio. No country breakdown is available yet.

CWI (State Street All Country World Index ex-U.S. ETF): This is another recently established all-world index. It has around 2000 stocks, has a 0.35% expense ratio (same as EFA), should yield about 2.5% (EFA yields 2.1%) and has about 13% in emerging markets. That's a pretty good percentage; it will be interesting to see if the Vanguard ETF has that much in emerging markets.

DTH (WisdomTree DIEFA High Yielding Equity Index ETF): WisdomTree released a slew of ETFs over the last year or so based on proprietary indexes. Their theory is that basing indexes on dividend yields can yield good growth; this theory has held water in the U.S. market since forever. This ETF will not have as much emerging markets exposure as CWI.

VEU and CWI could both be considered core portfolio holdings. I've added all 3 options to the Sectors page. There are no 2006 results for these investments, since they are brand new.

529 Plan Reviews

Morningstar ranks 529 plans. They have an overall review and a complete ranking of 529 plans with individual reviews.

Healthcare Sector Investing

One of the reasons the January Effect was interesting to me this year is that I've been considering putting some money in the healthcare sector for the long term. One of my healthcare stocks (I still own a few individual stocks) has disappointed me for 2 years now, so it's time for that stock to go. I'll put that money into a healthcare sector ETF; question is which one?

First, the 2 main ETFs:

Ticker	Name	2001	2002	2003	2004	2005	2006
IYH	Ishares DJ US Healthcare	-13.31	-21.29	18.35	4.22	7.66	6.16
VHT	Vanguard Healthcare Vpr					8.2	6.54

There's a 3rd option I don't have in the table yet; IXJ, the iShares Global Healthcare sector ETF. NOTE: I've added IXJ to the chart and you can view it here.

If you look at the limited back data the chart shows, the Vanguard ETF has an edge; this could well be due to Vanguard's low expenses.

IYH's top 5 holdings are Johnson and Johnson, Pfizer (both over 10)%, Merck, Abbot Labs, and Amgen. VHT's top 5 holdings are the same. IXJ's top 5 are JNJ, Pfizer, Noven Pharmaceutical, Rogers CP and GlaxoSmithKline.

Diversification and global reach are important to me. I like a global index, and IXJ has 35% of it's holdings in international companies vs. 15% in other healthcare ETFs. Plus 1 for IXJ.

The thing is, large caps make up 90% of its holdings, according to Morningstar (this index is a subset of the S&P Global 1200 index, almost all largecaps). If the huge healthcare companies aren't moving, this index won't move. In addition, IXJ has only 7% of its holdings in biotech, less than average, vs. 17% for the Vanguard ETF.

In the end, the Vanguard ETF VHT seems to offer some international coverage (somewhere around 15%), good biotech diversification, and the usual low Vanguard expense ratio - in this case 0.25%.

I'm only moving between 1% and 2% of the portfolio here, but the Vanguard ETF looks like the best call.

The Rule of 25

It's always tricky to figure out how much you'll need for retirement; my goal of "millions" doesn't really tell me anything.

I wrote here about how to figure out what you need by setting a savings percentage goal each year and aiming for a multiple of your pre-retirement salary.

There's another simple rule you can follow based, instead, on what you want your retirement income to be: The rule of 25.

The idea is this; you need a sum of money that will last at least 30 years. So, figure out a sum of money that allows you to withdraw 4% the first year, and at least 4% each of the following years in order to give you the money you need.

1. Figure out your retirement income. Usually, you start with 80% or 85% of your pre-retirement income. Say you were making $100k/year when you retired, and you'd like to have $85k/year after retirement.

2. Estimate what social security (via your social security statement each year) and/or any pensions will give you. Subtract that from your goal, in this case $85k. Worried about social security or unsure about that? Make the calculation easy and leave it out.

3. This is the total you need to fund. Multiply this by 25 and you'll get the amount you need to have saved. In our case, $2.125m.

Your first year of retirement, you withdraw 4%, and you adjust up a little bit each year to account for inflation - so you'll be upping the amount you withdraw each year by something between 2.5% and 3.5%.

This should stretch your money over 30 years (your investments will still be growing during that period, of course).

It seems like a lot to save, but keep several things in mind. Odds are you'll get something from social security. If you have all your debts paid off, AND YOU SHOULD, pre-retirement, you can reduce your retirement income needs. Finally, if the financial leaders of this country continue to keep low inflation as a primary goal as they have for the last 25 years, we might not need to worry quite as much about the erosion of the value of our retirement nest eggs.