Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
USDT is 9-11 for Central Banks the Bitcoin Black Swan - Tether Un-Stable Coin Ponzi Schemes! - 30th Jul 21
Behavior of Inflation and US Treasury Bond Yields Seems… Contradictory - 30th Jul 21
Gold and Silver Precious Metals Technical Analysis - 30th Jul 21
The Inadvertent Debt/Inflation Trap – Is It Time for the Stock Market To Face The Music? - 30th Jul 21
Fed Stocks Nothingburger, Dollar Lower, Focus on GDP, PCE - 30th Jul 21
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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