Pros offer resolutions to fund investors

NEW YORK -- Another new year is approaching, offering one more chance for self-improvement: to eat better, exercise, spend more time with family -- and invest more intelligently.

Fortunately, financial planners say there are several easy resolutions for the nation's 93 million mutual fund investors to consider. Here are some.

Diversify

Diversifying your assets means putting your money into different kinds of holdings, such as stocks, bonds and real estate, to reduce risk and possible losses.

When it comes to your mutual funds, diversification means owning shares of various types of funds, such as large-, mid- and small-cap funds, domestic and international funds and sector-specific funds, such as technology and health care.

"Diversification really is the best long-term solution," said Patricia Jennerjohn, a financial planner in Oakland, Calif.

Many investors learned the merits of diversification the hard way, she noted, after loading up on technology funds in the late 90s.

"As harsh as this market has been, it has taught people an important lesson," Jennerjohn said. "The best thing in the world is a boring portfolio."

Think about taxes

While investors can't determine the market's direction, they do have some control over the tax bite they have to endure.

According to the Securities and Exchange Commission, investors give back about 3 percent of their mutual fund's return to Uncle Sam. The SEC is hopeful that investors will have an easier time gauging tax implications starting next year, when funds are required to disclose after-tax returns, rather than just pre-tax results.

"If you don't watch yourself tax-wise, you will diminish your returns tremendously," said Ralph Scearce, a financial planner in Lexington, Ky.

Remember, the more shares that fund managers sell for profits, the bigger your tax bill for capital gains. This is mostly an issue for more actively managed funds, such as growth funds or certain sector funds, including those that buy technology stocks.

To get an idea of a fund's tax implications, examine its turnover rate for the last few years. The higher the rate -- that is to say, the more trades that are made -- the higher taxes are likely to be.

A turnover of less than 10 percent is considered quite good where taxes are concerned, Scearce said. He avoids funds with a turnover rate that exceeds 20 percent.

Pay lower fees

Fees are another area in which investors can exercise more control.

"Costs can take 20 to 25 percent of your return if you are not careful," and particularly in difficult markets, said Vernon Lee, a financial planner in Raleigh, N.C.

"A lot of people still don't pay attention to costs, but I think they have come a bit more to light" because of recent market downturns, he said.

Lee advises against paying more than the average fee of about 1.4 percent. But average fees vary by fund type. For example, index funds, which mirror major stock indexes like the Standard & Poor's 500, have the lowest fees, typically 0.5 percent because these funds require little management. But you still need to read the fine print. Some funds are pricier than others.