With all of the world’s markets down, how can you tell if your fund is really bad or just a helpless victim? If your fund is down, don’t be too upset because so is everyone else’s. It used to be that if stocks weren’t doing well you could go to bonds. If US companies weren’t performing well, then you could look overseas. There were even commodities, options, futures, and REITs…but now where can you go? It’s hard to find a place right now. There are still good investments out there, but they are a lot harder to find. If you are a rather wealthy person and by that I mean you have in the tens of millions to invest, there are some preferred investments that you will have access to and be able to do better than the average Joe. Also, if you have a broker who is very good and trades your money frequently and with a sharp focus you can make some returns. Some of the problems associated with this are increased fees, expenses, tax consequences, and a lot more risk. If you can’t take on more risk, and those other features don’t appeal to you then this might not be the best option for you as well. So here you are stuck and feeling hopeless. Some people opt not to look at their investment statements, while others are just mad at all of their holdings and want to do something completely different.
Neither the “ostrich with its head in the sand” or the “I hate everything” approach is going to work for you. You need to look at your statements, and have a chat with your advisor. Some of those funds may not be in your best interest any longer and should be removed or swapped for something else within that portfolio. Also, don’t get mad at everything, since everyone else is in the same boat. You shouldn’t scrap everything and start over (unless your original investments were wrong for you from the start). Some of your holdings may be fine and the first to bounce back. So how can you tell which holdings are great and which are losers? First off, let me remind you that one of my guiding principles is that unless there is fraud or bad intentions from the start, there is no inherently good or bad investment. They are simply tools, and we must pick the best tools for the job. More specifically, the best tools for your job.
So let’s assume either you are handling your investments yourself or you are working with an advisor that you are happy with. If you have an advisor and are not happy with him or her, now would be an excellent time to start looking around for a new person. Now please don’t hate your current person strictly because you have lost money. If you find a new advisor who promises that you won’t lose money, then you should run the other way. Unless you move all of your money into something fixed, there is no one who can guarantee against losses in the market. You should look for a new advisor if you don’t get good service, have different investment philosophies, or if you just don’t get along as people. But if your investments are suffering, it is a good time to sit down with them and perhaps change your game plan so you can better deal with today’s current situation. If your advisor is lacking in the service and personality areas then you should consider moving on. If you don’t have an advisor, then now would also be a good time to go looking. Most advisors will give you a free initial consultation so you can gauge how good their advice is and see if they offer something of interest to you. If you still want to handle your own investments that is fine as well.
Good advisors pay quite a lot to have good software to help then analyze different investments. But there is a lot you can do for free or almost free. If you Google your funds, then one of the choices on the first page is almost always a link to Morningstar. This will give you your funds style, past performance, a list of its expenses, who the managers are, and the Morningstar rating (from1-5 stars). That is free and very useful. The style is important because it lets you know what industries you are investing in, and whether or not this fund is aggressive or safe. There have been a number of times when after further examining a fund you discover that it is different than what its name implies, or invests in companies you had no idea about. The past performance numbers show you obviously the past performance. That is not nearly as useful as many people think. What you want these numbers for is to do a comparison. One of the available charts shows you how your fund performed compared to other funds in its own category or against the funds benchmark. This is very useful. If your fund is not doing as well as other funds just like it, or against the benchmark or standard that is used, then your fund may have problems. Either its fees are too high, or its managers are not that great. It provides no exact answers but it is a good guide as to the quality of your fund.
Another number listed is the expenses for your fund. Again, this is almost useless unless you have other like funds or funds in your portfolio to compare this to. You ideally want to keep these expenses low. But if you have been happy with the fund, and its performance has been good enough to justify a slightly higher fee then it’s worth it. This report also lists the fund managers. You already think that is boring, I don’t know any of them and who cares. This can make or break the fund. After all, a person or team is running the fund, choosing the investments, and when to buy and when to sell. If your fund has done well and all of a sudden starts tanking you need to look at the management as well as the market. Maybe the great fund manager left to go run a different fund. Now you have a replacement manager or a team without a leader and performance may suffer. This is why keeping tabs on managers is important. This can also signal a turnaround in bad funds. If a new manager comes in, he or she can turn around a fund and all of a sudden a dud becomes a star. That is nice when it happens, but you would think it was just luck if you weren’t following who was steering that ship. Lastly is the Morningstar rating. It sounds nice being able to say how many stars your fund has. But remember some of these stars are tied to performance, regardless of how the market is doing. There are some great funds out there who have suffered with the market and their star rating has dropped because of it. These are not bad funds; it is that their style of investing does not coincide very well with what is going on right now.
When you are determining whether or not your funds are good, please use a guide that includes your risk tolerance. Too many online calculators or fund guides only look at how many years you have to invest, or your age. Find one where you can answer some personality and investing questions to determine your risk profile. After all you are more than just your age. People of the same age have different goals, time horizons, and attitudes towards risk. Taking this into consideration can keep your portfolio better on track and allow you to sleep better. This will also let you know that your fund that is down 60% might not have been the correct fund for you to own in the first place. Moving forward you may want to avoid funds like that, or invest less in them. Selling off that bad fund and putting that money where it belongs now, may seem like quitting but it is not. Rebalancing when the market is down is a crucial step towards good money management. You may be able to “harvest” a tax loss as well. If you should have been in an investment to start with, sticking it out will not make the situation any better. I hope this helps you gain some perspective on your situation, and points you in a better direction with respect to your funds. Until next time…happy investing.
