The past two years have seen some hard losses hit investors' portfolios, with the "tech-wreck", a world economic slowdown, problematic emerging markets, a sick Japanese economy and, to a lesser extent, the effects of September 11.
This may have left many investors wondering what to do with their poor performing funds
- dump them and take the losses or hold on and break even?
The first thing you've got to do is put those losses out of your mind. I don't mean forget about them entirely. Hopefully you'll remember them vividly when the market hits another bull phase.
But for the purposes of figuring out where to go from here, those losses aren't part of the equation. What matters is how best to invest the money you have left.
Your first task is to set some investing goals. In particular, how long you plan to keep this money invested?
Is it retirement money that will stay invested for 10 or more years? Money for the kids' education? Will you be dipping into it for living expenses?
All these factors help determine your "time horizon". If you've got a long time horizon you can invest more aggressively because you have time to bounce back from losses. If you're going to need the money soon then you don't have as much room for recouping losses.
Don't think just in terms of what to do with your $100,000 (or whatever the sum may be) or what to do with your poorly-performing funds in isolation. Think in terms of what kind of portfolio you should have - "portfolio" meaning the money being invested plus all the other financial assets you own.
Think about diversifying your investments so you are not under- or over-exposed to any one sector, asset class, market or company. Diversification attempts to reduce your risks for a given level of return.
As part of this exercise, there comes a time when you should seriously start looking at dumping a fund. The following four scenarios are examples of when you should look to sell and reinvest elsewhere.
The fund doesn't fit your asset allocation
This is the most fundamental reason for selling. Suppose, for example, you are a low-risk investor who is wanting to preserve capital and receive a small income from your investments.
It is obvious that you should not be owning a high-risk technology stock, or an international share fund that invests in only one region of the world.
Review your objectives, your asset allocation and sell those that do not fit.
Your fund is a persistent loser
The fact that a fund has low returns or even losses isn't a good reason to sell.
If the overall market is down, as international sharemarkets have been, or the specific sector your fund invests in is out of favour, you can't expect your fund manager to be a miracle worker.
But if you own a fund that trails similar funds for two years by a substantial margin - say, two percentage points or more - then think about moving on.
The danger is that, if you're as addicted to raw performance as many managed fund investors are, you could be tempted to ignore everything else on this list and chase performance. But if your goal is to be a savvy fund investor and get the best results over time, don't replace one fund with another just because of performance.
Change of investment strategy
If you've tried to create a diversified portfolio, then you're probably counting on the managers of all your funds to invest in a certain way. The technology fund manager should be sticking to technology stocks, and the large-cap value fund manager should be buying large-cap value stocks. If they stray, it puts your entire plan into jeopardy.
Keep an eye on your fund, and what it is investing in. If your fund's investment strategy changes it is time to reconsider its place within your portfolio.
There's been a manager change
In today's fund world, many managers job-hop as often as Super 12 rugby players.
Any time your fund gets a new skipper, you should closely monitor the situation to assure two things: that the new manager is following the same investing style and strategy as their predecessor and that performance hasn't suffered. Give a new manager one year (and no more than two) to prove himself.
- FundSource Research
<< Return to the first article in this series
Ditching losers
The past two years have seen some hard losses hit investors' portfolios, with the "tech-wreck", a world economic slowdown, problematic emerging markets, a sick Japanese economy and, to a lesser extent, the effects of September 11.
This may have left many investors wondering what to do with their poor performing funds
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