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By Christine Benz and Jeremy Glaser | 01-21-2016 04:00 PM

Key Factors When Evaluating Funds for a Retirement Portfolio

Investors need to look beyond recent performance and ratings and consider costs, returns during a full market cycle, and fit, among other elements.

Note: This video is part of Morningstar's January 2016 5-Step Retirement-Portfolio Assessment Week special report.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. It's the 5-Step Retirement-Portfolio Assessment Week here on, and I'm joined today by Christine Benz--she is our director of personal finance--to look at what fund investors should keep in mind when evaluating the quality of their portfolio.

Christine, thanks for joining me.

Christine Benz: Jeremy, it's great to be here.

Glaser: So, if I'm in accumulation mode--I'm gathering assets for retirement--and I'm looking to assess the quality of my portfolio, what's the first thing I should look at? Is it just performance? Is that the first thing?

Benz: Well, it's a good starting point. Unfortunately, I think a lot of investors kind of begin and end their due diligence with a look at trailing returns. They think that if the trailing returns look great, it's a good fund; if they don't look so great, it's a poor fund. Or if it has a high star rating, that makes it good; if it's a low star rating, it's not so good. That's a decent first step, but it shouldn't be the ending point of your due diligence.

I think what's way more valuable than those trailing-return rankings, which can really swing around quite a bit, would be to take a look at the calendar-year-return rankings. So, you're looking not just at the fund's absolute return but also looking at its ranking within its peer group and looking at it on a year-by-year basis.

So, on, for example, you can stretch this out going back quite a ways, and I would urge investors to not just look at the past several years, which have been pretty decent for equity investors, but also take a peek back to 2008 to see how the fund performed during that period because a really common profile for more defensively positioned funds is that, until very recently, their trailing-return rankings weren't very good--but they were great defensive performers during the bear market. So, spend some time using those returns to kind of get a sense of what the holdings' characteristics are and what sort of strategy is in place. And you can use that to make sure that you have adequate diversification in your portfolio. So, not every holding needs to be a good defensive performer--you need more-aggressive holdings as well--but you want a balance of the two sets of characteristics.

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