Five Steps to Picking the Right Fund

Choosing a mutual fund is tougher than deciding between a tall mocha and a grande decaf at the local coffee shop. Selecting the right fund demands a ton of research and a break from our insistence on immediate gratification.

With that in mind, here is a five-step checklist to help you winnow down your search and streamline the decision-making process. And remember, a good cup of coffee will get you through the morning, but a good mutual fund will get you through retirement.

1. Know What You Need

Before you buy any funds, you should review your portfolio to prevent overlap in overall asset allocation. Adding funds haphazardly is akin to betting on a hand of poker without first looking at your cards, and there is simply no need to weigh yourself down with too many funds.

"If you have more than five stock funds, you have too much," says Vicki Schultz, a Nevada-based financial adviser. "Large-cap, mid-cap, small-cap, and maybe two specialty funds like real estate and international are all you need, provided they are good ones."

Also, if you need to replace a poor-performing fund, then you should try not to dwell on short-term penalties associated with selling early. Rick Bloom, financial adviser at Bloom Asset Management in Michigan, says, "When a new client comes to me, I compare the funds in their existing portfolio to similar ones in their categories. If they are not better than the average fund in their category, then I get rid of it. It does not matter about taxes or fees -- you can't let a 2% penalty dictate the 98% left in the fund."

2. Performance Matters

Ask any financial adviser and they will tell you performance is most important. But there's more to performance than just beating any old index. You need to see how your fund stacks up against the right index.