Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Buying a Custom Built Gaming PC From - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Eight Ways to Tell If You Should Hold or Fold Your Mutual Fund Investment

InvestorEducation / Learning to Invest Jun 08, 2010 - 05:39 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleLarry D. Spears writes: With the whipsaw patterns U.S. stocks have experienced in recent weeks - both the Dow Jones Industrial Average and Standard & Poor's 500 Index are down 12% from their highs for the year - even the most ardent buy-and-hold investors are studying their portfolios, searching for holdings to cull.

But what if your buy-and-hold strategy has been implemented using mutual funds? As part of a solid "defensive-investing" review, should you consider bailing out of your current mutual-fund holdings at this point and start looking for better funds to ride into any future recovery?

You'll only know if you take the time to make the review. And you should take that time.
In this two-part story - this is Part II - we examine the eight questions to ask yourself as you attempt to determine whether your mutual fund still fits you - or whether it's time to move in another direction. Part I appeared yesterday (Monday).

Here are the remaining questions mutual-fund investors need to ask:

4. Has the performance disparity upset your portfolio balance? Over time, economic conditions and differences in the performance of various market sectors - and the funds in your portfolio that track them - can cause asset-allocation percentages to diverge from your desired levels. For example, a couple of big winners by your speculative fund manager might put 20% of your assets in that category, rather than the 10% you want - leaving a smaller proportion for other categories, such as income.

Dealing with this situation - and preventing it from getting worse (further out of balance) - demands that you adjust your holdings on a periodic basis, a process known as rebalancing. If you have just one fund in an "over-weighted" segment of your portfolio, you would sell some of your shares and reinvest the proceeds in existing or new funds in a different, currently "under-weighted" category. If you have more than one fund in a sector that has become over-weighted, sell the weakest performer in the group.

When should you do this rebalancing? There are several schools of thought. Some advisors suggest following a regular schedule - say, every 18 months to two years, if needed - while others suggest doing it after the market has experienced major rallies or after specific sectors have pushed the weightings in some categories to new highs.

Whichever approach you choose, be sure to factor tax consequences into the equation; having to pay too much to Uncle Sam - or having to pay that extra levy at the wrong time - could negate the benefits of rebalancing.

5. Are your fund's fees going up? Mutual funds are generally considered longer-term investments and, over time, even small increases in fund fees and expenses can eat away at your long-term returns.

Fee increases can result from numerous factors. Sometimes, it's simple greed by the fund managers. Other times, it can signal a drop in operating efficiency. Rising expense ratios can also be the result of excess redemptions, with a fund raising annual fees because it has to spread its expenses out over fewer shareholders. This was responsible for a huge wave of fund-fee hikes after investors bailed out of the stock market in late 2008 and early 2009.

Whatever the cause, fund fees have trended higher in recent years. According to (Nasdaq: MORN), today's average annual fund expense fee is 1.34% of assets. That's down slightly from 1.38% in 2000, but well above the Morningstar estimate of 1.18% for 1990.

All funds charge fees - even those, such as index funds, that aren't actively managed. So you shouldn't automatically sell when a fund increases its expenses, especially if the fund company offers a reasonable justification. By the same token, you shouldn't pay more for less performance. If fees are going up and returns are going down, look for a lower-cost fund in the same sector.

The same applies to sales charges. Paying a high "load" without a good reason makes little sense given the number of no-load funds out there that perform well for less - and often with greater efficiency.

6. Are you happy with the fund's manager? When you place your money into a mutual fund, you're putting a certain amount of faith in the manager's expertise and knowledge - talents you hope will lead to an outstanding return on an investment that fits your investment goals. If the fund performs well, the manager generally gets your praise - and, if it doesn't, he or she gets the blame (deserved or not).

However, evaluating portfolio managers isn't quite that simple. Some do very well when the market is suffering, then lag when the market turns higher. Others outperform on bullish moves, but slide to the bottom of the rankings in downturns. A very few outperform in up and down markets alike.

In the end, what most investors prefer is a manager who can achieve a balance over time - maybe not the best in good times and certainly not the worst in bad. What very few want to see is a change in their fund's manager.

As already noted, some managers leave on their own job, riding your fund's success to new opportunities. Others get the boot, usually due to poor performance. Either way, a change in managers will likely lead to at least modest changes in the fund's style and in its results; after all, the new manager will want to "make his own mark" with the fund.

Just as two to three years of patience may be needed for a good fund gone bad to recover, you should resist the urge to immediately leave a fund just because of a change in managers. It typically takes at least six months for a new manager to restructure his predecessor's portfolio. So you probably needn't worry about a further dip in returns before that. At the same time, however, you can't expect to see an immediate improvement in results.

How long you give a new manager to prove himself after that depends on his past performance - which the fund will publicize when the appointment is made - and his early results in this new job. If both are good, hold your shares for a year or two; if either makes you nervous, switch sooner.

7. Are you familiar with the fund's board - and do you approve of the board members' actions? Most investors know about the individual or team that manages their fund's portfolio, and they're familiar with the management firm that runs their fund's "family" and sells its shares. What many investors don't realize is that both must answer to the fund's Board of Trustees, which is legally responsible for evaluating fund performance, hiring and firing managers and setting shareholder fees.

That fact got major attention in late March, when the U.S. Supreme Court ruled (in Jones v. Harris Associates) that fund managers can continue to set fees according to past standards, but must provide justification to the boards of trustees whenever fees charged to retail fund customers are higher than those assessed to institutional clients.

Recent studies had indicated fees for retail-fund shareholders are often double those of institutions, which has led critics of the fund-management system to charge that boards of trustees aren't doing their jobs. The critics cite close ties between trustees and fund operators, the fact that some boards oversee dozens - or, in some cases, even hundreds - of funds, and that boards rarely fire fund managers, even when the fund's performance is dreadful.

The ruling sparked much discussion at the national meeting of mutual fund executives in Washington in early May, with some observers predicting that trustees will:

•Be pressured into conducting much stricter oversight of fund operations.
•Be more closely reviewing managers' relationships with institutional clients.
•Eventually have to mandate lower fees.
"They're not going to want to get sued," Ben Phillips, a partner and the director of research for management-consulting firm Casey Quirk & Associates LLC, told

Others didn't see the ruling leading to major changes, noting that U.S. mutual fund fees are already among the lowest in the world.

"The ruling seems to presume directors have never looked at differential fees in the past, and that's not the case," Bruce Crockett, chairman of the board that oversees the Invesco Ltd. (NYSE: IVZ) family of funds, told FoxBusiness. "I don't see how this [the ruling] changes much."

Crockett doesn't see a big increase in the number of portfolio managers being fired by trustees for poor performance, calling the replacement of a manager "a nuclear option."
One way some companies ensure directors closely watch out for shareholder interests is to require board members to invest in the funds they govern, but a recent survey of America's largest fund companies found that most merely encourage directors to own shares rather than requiring it.

There's also a move afoot to get the U.S. Securities and Exchange Commission to change its rule regarding independent oversight of fund operations. The current rules require 40% of a fund board's seats to be held by independent directors, but a change would apparently have little impact since a survey last year found that independent directors already make up three-quarters of fund boards in nearly 90% of fund companies. Almost two-thirds of fund companies also have boards with independent chairpersons.

As an individual shareholder, you really have no easy way to determine how strongly your fund's board stands up for your rights. But if the fund shows a recent trend toward rising fees coupled with marginal performance, something's likely amiss with the fund's oversight and you may want to consider a switch.

8. Do your funds continue to meet your goals? When you're just getting started in the investment world, mutual funds serve a valuable purpose, providing you with a level of diversification and access to securities and asset classes you otherwise couldn't afford. But as you gain experience and acquire more wealth, you may prefer to invest directly and manage your own portfolio. If you're moving into that phase in your investment career, that alone may be reason enough to start moving out of funds.

Similarly, as you age, your life goals change, and that - more than performance - can prompt a "Sell" decision. Do you need cash for a child's college, a new house, or some other purpose? Do you need income for retirement rather than growth? Are you becoming more conservative and feel you can no longer handle the volatility of high-tech or other speculative funds? Does your current tax situation make selling more affordable at this time?

Any change in your investment or life goals is a good time to consider a mutual fund sale - and only you can provide the answers to the many possible questions involved in your decision.

This article provides a lot of useful guidelines, but you have to tailor them to your own situation - and adjust them as needed.

As John Bonnanzio, group editor of the newsletter "Fidelity Insight," often says: "I think the first rule ... when it comes to buying or selling any actively managed fund, [is that] all rules are meant to be broken."

Which leads to one final tip: If you know you don't have the patience to give new managers a chance, endure occasional poor returns and wait two or three years for good funds to recover, you may want to sell all of your actively managed funds. You may get better results - and sleep more soundly - by relying on index funds.

[Editors' Note: For a sidebar on this story that appears elsewhere in today's issue of Money Morning, please click here. For other stories in Money Morning's "Defensive Investing" series, please click here.]


Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules