At one time or another, a buy and hold forever investor will find themselves in a situation when a great fund they own, for one reason or another, drifts to the bottom of the investment universe.
I have seen one-time hot funds from Idex, Munder and Janus sizzle and then peter out.
When that happens investors either can sit back and wait as fund managers try to work their magic to make the funds relevant or simply shed them for better performing options. Investors do not benefit for being loyal. Fund families are the only beneficiary of investor loyalty. Investors end up holding essentially dead money or money that is not producing the returns that other similar funds are providing their clients while the fund tries to get its Mojo back.
The most recent fund that is has lost its way is Fidelity Magellan. Magellan, when it was considered the greatest fund in the world, was managed by Peter Lynch who provided annualized returns of 29% from 1977 to 1999. Today, after a series of managers who tried and failed, Magellan has faltered from a behemoth of some $90 billion in assets to a paltry $23 billion. It sports a Morningstar rating of one star out of five and an annualized rate of return from 2005 to the present of 2.5%. Still there are investors who will stick with the fund even if it means losing every penny they have invested.
How do you determine your good fund has soured and you better be looking for a new investment?
- The Mutual Fund switches manager(s).
- Performance lags peers & indices for two-three years.
- Fund management changes investment philosophy
- Fund assets bloat or decrease dramatically
- Investor’s investment philosophy or needs changes
Once you make the big psychological step to start anew you have to ask what do you want? Is it income, growth a combination of the two or preservation of principal. Here’s a chance to start fresh and get best of breed.
How complex? Do you want a combination of stocks, exchange traded and mutual funds or just stocks or just funds? Do you plan on trading? Are you going to manage or should someone else do it for you? Research is another thing that you need to do and by that I mean not just picking up an old copy of Money Magazine at your dentist’s office and seeing what funds the Money Mag staff likes or doesn’t.
You don’t have to wholesale dump everything and jump into new funds and investments if you don’t want to. You can start with the worst performers in your portfolio and peel them off and add new funds to replace them in the same sector or category. As time goes on you’ll rebuild and create a plan you can be proud of.
If you have a portfolio of $25000 or less one or two holdings should do just fine. Over allocating just muddies the water and is the number one mistake amateur investors make. Keep it simple. Understand what you sell and buy and keep the risk within your comfort level.
Last, don’t allow tax benefits to be the only thing you hang your hat on to sell or buy an investment but at the same time don’t forget it. Right now many people holding investments can sell them in 2011 and gain substantial losses for the current year and possibly going forward. Those benefits may indeed be gone by 2012.
Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.
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