Designing a great investment portfolio is no easy thing. You need to consider factors like your goals, risk tolerance, age, income, your spending needs and wants and your prior investment experience, to name just a few. All of that information should guide you towards a particular asset allocation of stocks, bonds, cash/ cash equivalents and possibly some alternative investments.

In addition, you need to determine how much to invest internationally businesses versus U.S. businesses. If you’ve nailed down all of those pieces, you have graduated to the next step of portfolio design: choosing the actual funds that you will invest in.

One important selection criterion to consider is the cost of the fund. Every mutual fund (MF) and exchange-traded fund (ETF) has what’s called an “expense ratio”—the cost of owning the investment. These fees pay the professionals who are managing the funds, and can range from just a few hundredths of a percent to, shockingly, over 2 percent per year. The evidence shows that funds priced in the lowest 20% of their peer group have a better chance of performing well than funds priced in the other 80%. With this in mind, I generally subscribe to a low-cost philosophy when selecting funds, whether for my clients or for myself. There are a handful of funds that don’t fall into that lowest 20% that I use, due to other factors discussed below.

Another important consideration is the management team. Who is managing the fund? Is there consistency on the management team, or does it change frequently? How much experience does the management team have? What is the management group’s philosophy that drives the holdings that they select for the fund? In my experience, I want a management team that is experienced, consistent, and has an investment philosophy that matches well with my portfolio goals.

A third consideration is the track record of the fund. How long has the fund existed? How does the volatility of the fund compare to other funds in its peer group? What has the fund performance been over 1, 3, 5 and 10-year periods, again compared to its peer group? I’m generally looking for funds with a minimum of a 5-year track record, although I prefer 10 years. I will sometimes make an exception to this when a company launches a new ETF that is meant to essentially clone an existing MF with a long and successful track record. For performance, I like to see consist performance over time in the top 50% of peer funds.

You might be wondering why I don’t recommend selecting the fund that has been #1 in its peer group over the last year, with the assumption that it will continue to outperform. Very simply, there’s no evidence from long-term research to show that investors can outperform with that strategy, since the same fund is very rarely a top performer in consecutive years. So instead of chasing the shiniest carrot, I recommend looking for funds that share multiple positive qualities in the areas that I’ve outlined.

I’ve simplified the process for the purposes of this article, of course. I use software at work that allows me to do deeper dives into publicly traded funds, and also gives me the capability to align a client’s investments with their values. But for the many people who are DIY investors, hopefully this article can help you to improve your processes and fund selections.

However you select your portfolio funds, invest smartly and invest well!

Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.