The speaker was ripping mutual funds as part of a spiel that he hoped would sell a stock-trading investment-education program. The best you can...
The speaker was ripping mutual funds as part of a spiel that he hoped would sell a stock-trading investment-education program.
The best you can expect from funds, he said, is that they will go sideways. They’re sure to disappoint you. Most people in the room at the Westin Hotel in Waltham, Mass., agreed.
Then the instructor, who was espousing the values of trading stocks, made his only remark about funds all night that made any sense: “Why would anybody stick with funds when they aren’t getting anything good from them?”
The average fund does not lose money or move sideways over time. A disappointed investor might buy that hype, but it’s not backed up by numbers.
Still, plenty of investors are disappointed with their funds’ performance, and there is no denying the thousands of mediocre funds out there.
Because the fund world isn’t a meritocracy, where only the best survive, investors disappointed in the issues they own must also be upset with themselves. Knowing why you should sell a fund is every bit as important as knowing what to buy.
Most people sell funds for just one reason: poor performance. But fund firms often are rewarded for mediocre results by investors who stick around hoping things will get better.
That’s how the guy running the seminar can talk about fund investors moving sideways.
If you are wondering whether your fund is worth keeping, consider the following:
• How has the fund done compared to its peers?
Losses or unexpectedly slow returns are the biggest concern for investors, obviously, but a losing fund may be at the top of an ailing asset class.
If poor returns make you realize that the asset class is wrong for you, dump the shares in favor of something completely different. But if you have a long-term outlook, compare the fund to its peers to see whether it’s a laggard.
• Has the fund changed strategies or missions?
This happens less now than in years past, but if a fund stops buying the things you bought it for — maybe it has grown and is now investing in mid- or large-cap stocks instead of small ones — you may want to look for the exit.
• Has management changed?
A change in managers should make you anxious, but there are plenty of cases in which a star manager has left and the fund has barely missed a beat.
Still, if performance declines after a change — or if you hope a new manager will get things back on track and you don’t see improvement — it’s a reason for concern.
• Have you reached your goals, or will you soon?
If you buy a fund for a reason — to pay for college or retirement, or to buy a car — and have reached the goal, use the money for its purpose or get conservative with it to ensure its availability when needed. Don’t reach the target and then borrow money — from, say, a 401(k) or on credit — to avoid cashing in.
Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at firstname.lastname@example.org or Box 70, Cohasset, MA 02025-0070.