Back-to- school time is about preparing for the year ahead, sparking the memory and finishing the summer reading list, getting ready for...
Back-to- school time is about preparing for the year ahead, sparking the memory and finishing the summer reading list, getting ready for the next challenge.
It’s the same in mutual funds, where investors should go back to school on their own holdings as the calendar year starts to wind down and annual numbers start to come into focus and push on decisions.
It’s the time when you position a fund — and your thinking — for the big test, namely how you will see it when the year ends and you review performance.
With that in mind, going back to school on a fund should include a self-quiz on the fund that becomes the basis for future reviews. Here are questions you’ll need to answer:
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What made this fund stand out to me in the first place?
Maybe it was the tip you got from a friend, adviser, newspaper, magazine or newsletter, the ratings you looked at, or the short-term recent performance.
It also could have been a low minimum initial investment, or a specific manager you saw or read about. Those things change over time. Or your fund might have sunk to the bottom of the charts.
Low minimums tend to be important to young, new investors, but can become a nonfactor in time.
Has this fund been within my range of expectations, and how has it done against its benchmarks?
The more clearly you articulate your expectations, the better. Maybe you wanted above-average performance in the peer group, or perhaps it was hoping for an average annualized return of 8 percent or more.
It might have been the downside protection you felt the manager could provide when the market soured.
By laying out your hopes in terms of absolute returns, performance against peers or benchmarks, and how much they might swing in good and bad markets, you can see if the fund has lived up to your hopes.
Is the fund doing the job it was purchased for? Has it changed?
Every fund should have a job in your portfolio, whether it is simply covering a certain asset class or investment style, bringing you the expertise of a certain star manager.
Over time, however, funds change, managers retire and the great fit you first purchased may be outside of the comfort zone today.
What has changed? Is it the fund, the market or me?
Many investors are comfortable with funds, right up to where they live through the worst a fund can deliver.
All of a sudden, there’s too much risk. The key is to see if a fund is really different.
Would I buy the fund again today?
You may want to withhold the answer until looking at your entire portfolio, possibly at year’s end. There may be tax considerations for staying put, but if you wouldn’t buy a fund today, you should question why you still want to own it today.
Chuck Jaffe can be reached at email@example.com or Box 70, Cohasset, MA 02025-0070.