If you want to give yourself a better chance of identifying the winning funds in a very crowded field, here are some practical suggestions.

Which Fund Types?

Start by selecting the asset types you prefer. Those you want in yourportfolio may be some or all of these: large capitalization equities, small capitalization equities, international equities, global (domestic and foreign) equities, cash equivalents, fixed-income securities and index funds. This should not be a casual decision. The risk levels and potentialreturns various types of funds offer can be very different. The price ofhigher potential returns, of course, is greater volatility. You may achievehigh returns with high-risk securities; you may also experience large losses. But carefully allocating assets – diversifying your portfolio acrossfund types – is generally a good strategy for reducing overall risk. Withinfund types, each fund you invest in will itself be a diversified mix of many different securities.

Which Funds?

Next, look for the better-performing funds within each fund category you decide to use. Your objective should be to choose a limited number of high-quality funds for your portfolio. Sources of information include theinternet (for example, Morningstar at www.morningstar.net and individualinvestment company sites), magazines (such as Money) that cover mutual funds, The Wall Street Journal or other newspaper listings, and prospectuses you request for funds you want to examine closely.

Year-by-Year Performance

As you investigate possible investments, it is important to check multi- year performance year by year. First, look for consistently successfulresults relative to a comparable market index. If a fund’s performance hasbeen erratic – sometimes outstanding and at other times below par – it is probably not a good place for your money. (But, remember, when theoverall market is poor, as it was in 1994, for example, even the best managers will have lower results than they do under more positive market conditions.) Second, consider the funds’ risk ratings within the context ofthe type of securities they invest in. Risk levels differ among comparablefunds. You may want to avoid those with above-average risk. And third,look for stable management. Let others risk their money with untestedmanagers. It is a much sounder move to go with those who have a historyof achievement.

Fund Size

Finally, examine the sizes of the funds you are considering. Successattracts money to funds. That is fine for the company managing the fund,but not necessarily for individual investors. Large amounts of moneypouring into a fund can make it increasingly difficult to manage. That iswhy some very successful funds close to new investors. Check a fund’stotal assets relative to comparable successful funds, and be very cautious about investing in a fund that is already bulging with other investors’ money.

Finding good funds takes more effort than checking the latest numbers, but it is a job you can do if you spend the time.

(Alan S. Moore is a financial advisor at Legg Mason Wood Walker, Inc., asecurities brokerage and financial services firm and member of the New York Stock Exchange, Inc. and SIPC.)

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