Session 12 — Mutual Fund Selection
Age-flexible: costs, diversification, taxes • simple model portfolios

Session 12 — How to Play the Fund Picker (and Why It Matters)

Your goal today: build a simple, low-cost, diversified long-term portfolio like a real 401(k)/IRA investor.

Quick Start (2 minutes)

  1. Set your profile: choose an investing horizon (years to goal) and risk comfort (low / moderate / higher).
  2. Pick core funds/ETFs: start with broad indexes (US stocks, international stocks, bonds). Keep it simple (3–5 funds).
  3. Check costs: prefer lower expense ratios. Fees compound against you.
  4. Stress it: run the bear/bull scenarios. If a −25% year would make you quit, lower risk (more bonds/cash).
  5. Save your work: screenshot your allocation & fees and write a 3–5 sentence rationale.

Go to the game ↓

Why this matters:
  • Time in the market beats timing the market.
  • Asset allocation drives most of your risk/return.
  • Fees are guaranteed—returns aren’t. A 1.00% fee can erase years of compounding.
  • Behavior (panic selling, chasing fads) is the #1 destroyer of returns.

Step-by-Step Workflow (10–15 minutes)

1) Define yourself

  • Horizon: years until you’ll need the money (retirement? grad school?).
  • Risk: if a −25% year would make you quit, choose a more conservative mix.

2) Build a core allocation

  • Three-fund idea: US Total Stock, International Total Stock, US Total Bond.
  • Optionally add real assets or TIPS after the core is set.
  • Keep chosen funds low-cost and broad.

3) Sanity-check costs & diversification

  • Target weighted expense ratio ≤ ~0.30% for a vanilla student portfolio.
  • Avoid overlapping sector bets you don’t understand.

4) Stress test

  • Run the bad-year scenario. If you’d abandon the plan, reduce stocks / add bonds.
  • Run long-run projections to see compounding with contributions.

5) Finish & reflect

  • Export/screenshot allocation + fees.
  • Write 3–5 sentences: your horizon, risk level, chosen funds, fees, and why this fits you.

401(k) vs. Roth IRA — What’s the difference?

Traditional 401(k)

  • Tax now: pre-tax contributions reduce taxable income today.
  • Tax later: withdrawals taxed as ordinary income.
  • Employer match: often available; always take the match—free money.
  • Menu: limited to plan funds; fees vary by employer.

Roth IRA

  • Tax now: after-tax contributions (no deduction today).
  • Tax later: qualified withdrawals are tax-free.
  • Access: contributions (not earnings) generally accessible if needed (rules apply).
  • Menu: you choose the brokerage; usually very low-cost index options.
  • Roth 401(k): after-tax inside a 401(k). Employer match (if any) lands in the traditional side.
  • Income limits: Roth IRA contributions phase out at higher incomes; check current IRS limits.
  • Withdrawals & penalties: early withdrawals of earnings can be taxed/penalized—know the rules.
  • Always read your plan document: fees, funds, and rules differ by employer.

Roth vs. Traditional — quick helper

Classroom heuristic, not tax advice. Laws & plan rules change.

What to submit

  • Screenshot of your portfolio allocation and total weighted expense ratio.
  • 3–5 sentence rationale covering horizon, risk, chosen funds, fees, and what you learned from the stress test.

Go to the game ↓

Step 0 — Your Profile (age-aware)

Rule of thumb examples (not advice): “110 − age” for stock %, and tilt down if risk is Low or horizon is short. You can still override anything below.

Step 1 — Fund Universe (20 sample funds)

Illustrative classroom data (tickers, ERs, returns are simplified). Use your platform for live data.
AddTickerNameCategoryERIndex?Turnover1y3y5y
Shortlist 0

Step 2 — Compare & Score

Scoring (simple): Cost 40%, Tax efficiency 20%, Diversification 25%, Fit to your suggested profile 15%.

Step 3 — Build Portfolio

Starter models

Step 4 — Cost & Tax Impact (compounding)

What this shows
  • Compounds with and without the stated ER & tax drag.
  • Outputs the dollars lost to fees+tax drag.
Growth

Step 5 — Stress Scenarios

How we estimate
  • Expected return = weighted stock/bond return by your Step 3 weights.
  • Simple compounding with annual steps (no randomness here).
  • Good for ballpark intuition — not a forecast.
Balance projection

Step 6 — Resources

Learn & compare
Brokers / fund families
Classroom only — not investment advice.

Step 7 — Homework & Quiz

Homework (1 page max):
  1. Pick a target mix for your age/horizon and explain why in terms of costs, diversification, and staying power (i.e., can you stick with it in a bad year?).
  2. List 2–3 low-cost funds to implement it (US Total / International / Bond). Include tickers, each fund’s expense ratio (ER, in bps), and the weighted portfolio ER.
    Use this demo to help you choose funds: Morningstar Fund Selection Demo . Weighted ER (bps) = Σ(weighti × ERi). Example: 60% @ 3 bps + 30% @ 7 bps + 10% @ 3 bps → 4.5 bps.
  3. Show the 30-year impact of ER = 5 bps vs 60 bps at 7% gross with $300/mo contributions. What’s the dollar difference? (Use Step 4 — Cost & Tax Impact or the Excel formulas in the hint below.)

Turn-in checklist

  • Target mix with a 3–5 sentence rationale (costs, diversification, staying power).
  • 2–3 funds with tickers + ERs, and your weighted ER shown/calculated.
  • 30-year fee impact comparison (5 bps vs 60 bps) and the dollar difference.
  • Screenshot from Step 3 (allocation) and Step 4 (cost chart) is encouraged.

Excel solution — 30 years, $300/mo, 7% gross, 5 bps vs 60 bps
Set up these inputs in Excel (any cells):
LabelValue
Gross annual return0.07 (format as %)
ER (bps) — Case A5
ER (bps) — Case B60
Monthly contribution300
Years30
Initial balance0
bps = basis points. 5 bps = 0.05% = 0.0005 (decimal).
Use these formulas (end-of-month contributions; type=0):
  • Net rate A: =0.07 - 5/10000 → 6.95%
  • Net rate B: =0.07 - 60/10000 → 6.40%
  • FV A: =FV((0.07-0.0005)/12, 30*12, -300, 0, 0)
  • FV B: =FV((0.07-0.0060)/12, 30*12, -300, 0, 0)
  • Difference: =FVA - FVB
Minus sign on the payment makes FV display as a positive dollar value. type=0 = contributions at the end of each month (matches your app).
Expected result (matches the app’s monthly math):
5 bps (6.95%) → ≈ $362,401 • 60 bps (6.40%) → ≈ $325,476 • Difference ≈ $36,925.
Common mistakes: using 7% gross directly, forgetting to divide by 12, or using type=1 (beginning-of-month), which inflates FV compared to the app.
Formula (plain-English):
FV = M · [((1 + r/12)^(12·n) − 1) / (r/12)], where M = $300, n = 30, r = 0.07 − ER.

Class Picks — Summary (Session 12)

Sample size: 16 submissions. Most of you built a simple, low-cost 3-fund portfolio.

  • Average stock/bond split: ≈ 77% stock / 16% bond (remainder cash or not specified).
  • Median stock: 80%. Median bond: 17%.
  • Common mixes: 60/20/20 (US / Intl / Bond) · 80/20 (Stock / Bond) · 83/17 (Stock / Bond).
PatternCountNotes
60% / 20% / 20%3US stock / Intl stock / US bond
80% / 20%2Stock / Bond (often all-US stock)
83% / 17%3Stock / Bond (several all-US)
Other (95/5, 91/9, 89/11, 88/12, etc.)8Higher-stock tilts
Most-popular tickers (by mentions):
  • VTI (Total US) — very popular
  • VXUS (Total Intl) — frequent pair with VTI
  • VTSAX (Total US index fund share class)
  • BND (Total US Bond)
  • VOO (S&P 500), SWTSX (Schwab Total US)
Why these? Low fees, broad diversification, and easy long-term maintenance.

“How you chose” — themes I saw

  • Low costs first: Index funds/ETFs with very low ERs (often single-digit bps).
  • Broad core allocation: US total + international total + US bond (simple 3-fund).
  • Age/horizon fit: Many used ~80/20 or 60/20/20, then stress-tested behavior in a down year.
  • US tilt: Most kept a larger US slice (e.g., 60–70% of equities) with a smaller VXUS/IXUS piece.
Quick fixes / pitfalls I noticed:
  • “BNO” is NOT a bond fund — it’s an oil ETF. If you meant bonds, use something like BND (Total US Bond).
  • Typos: “vuxu” ⇒ VXUS; “jxus” ⇒ IXUS (iShares Total Intl).
  • Cash allocations (20%) can drag long-run growth for long horizons. Prefer bonds if you want to dial risk down.
  • Active “Blue Chip” funds usually carry higher fees; make sure the extra cost is intentional and justified.
Instructor reflection: Your choices line up with our scoring: low expense ratios, broad diversification, and fit to your horizon/risk. If a −25% year would make you quit, lower the stock weight (e.g., move toward 60/40 or add more bonds) so you can stay the course.

Quiz

Open Session 12 Quiz Opens in a new tab/window.
SEC Oversight & Key Rules — Mutual Funds

Authoritative links for class use (official SEC pages).

Who regulates mutual funds?

Core statutes

Key mutual-fund rules (open-end funds)

Required filings & where to find information

Classroom resource — not investment or legal advice. Always check your plan’s documents and current IRS/SEC rules.