When Was Your Last Thorough Portfolio Review?

Now may be a good time to assess the performance of your mutual funds.

When markets are down or sluggish, it’s easy to feel that your mutual fund is underperforming. But assigning a term like “underperforming” to a fund should take many factors into account. So if your fund is down enough to worry you, it’s a good idea to call your financial advisor with some key questions.

First, should you be in the fund in the first place? A fund that has returned 10% over a certain period may seem “better” than a fund that has returned 3% over the same period — but the better-performing fund may have earned those returns by taking on certain market related risks that you might not want to assume. As investment objectives can vary widely among investors, you might need to consider whether the fund is compatible with your individual goals.

Second, how is the fund performing relative to other funds in its peer group? Different asset classes (such as large company stock funds and bond funds) can be expected to perform differently because they have different risks. For example, stock fund values tend to be sensitive to equity market fluctuations, while bond fund values tend to be sensitive to interest rate movements. Before concluding that your fund is underperforming relative to another fund, be sure that you’re comparing apples to apples.

Third, how is the fund performing relative to its appropriate benchmark? Most mutual funds impose certain requirements that can limit a portfolio managers’ investment options. For example, if a stock fund requires 80% of its portfolio assets to be invested in stocks, the portfolio manager might not be able to more than 20% of assets to bonds or cash, even in a bear market. Because of this, a reasonable standard for measuring mutual fund performance might be to consider how the fund’s performance compares to the overall performance of an appropriate index. “Appropriate” is the key word here. If your fund consists of bonds, you will not want to compare it to the Dow Jones Industrial Average. Even for some stock funds (such as those with small-company stocks or international company stocks), the Dow might not be an appropriate comparison.

Fourth, are there any extenuating circumstances to explain the underperformance? For example, there are could be reasons why you would not to place too much weight on short-term performance; especially if the economy as a whole has experienced a downturn in production. On another note, perhaps you bought a fund that has performed poorly in the past, but you also believe that a new management team will turn this around in the near future. This factor is particularly important to remember after a decade like the 1990’s in which increasing annual returns were achieved by many. In view of this, you might want to consider whether your expectations are realistic. Before you cash in your “underperforming” shares, you may want to determine the factors that are driving the performance of your funds.

Fifth, what fees are you incurring each year? It goes without saying that investment management, distribution, and administrative fees charged by your fund can have a significant effect on your overall return, and these fees can vary greatly from fund to fund. Do you know what your fund investments are costing you? Do you know if the fees charged by your fund are competitive with the fees charged by similar funds? If you don’t, now might be a good time to check into this.

Lastly, are you using money market funds for your short-term needs? Investors are often told that they should keep a cash reserve of three to six months worth of living expenses to pay for unexpected bills, such as a medical emergency, or home or car repair. But by using a typical, low yielding money-market mutual fund and inflation over 2%, your 'just-in-case' money could actually be losing purchasing power with each passing day. Therefore, yield conscious investors may want to look at ultra short-term bond funds as an alternative.

Ultrashort bond funds have shorter average maturities than most other bond funds. This means that their share price should fluctuate less whenever interest rates change. However, not all ultrashort bond funds are the same and can possibly leave you with negative returns. Ultrashort bond fund managers have a goal to deliver a higher yield than money market funds. To meet this expectation, some have invested heavily in lower-quality issues and taken on significant credit risk in industries such as telecommunications or bank loan pools. When the economy takes a downturn, those bonds can lose value or default. Shareholders then end up with negative returns and discover that they may have been better off in a money market fund. For that reason, it is important for you to understand what the fund owns before you invest money.

Please contact me if you would like more information on an ultrashort bond fund that I am currently recommending. It takes on minimal credit risk and can be a good alternative to money market funds as long as you don’t mind slight fluctuations in principal.

We can provide you with more information on the yardsticks that would be appropriate for measuring your mutual fund’s performance. We can also provide you with an independent review and analysis of your portfolio. Just contact us for a personal evaluation and analysis. Please use the use the CONTACT US link and let me know.

I look forward to meeting you!

Note: Fees may apply when investing in mutual funds. Mutual funds are investments involving risk and are offered by prospectus only. Investment return and principal value will fluctuate so that upon redemption an investor's shares may be worth more or less than original value. An investor should carefully consider the investment objectives, risks, charges and expenses of a fund before investing. The fund prospectus contains this and other information about the investment company. For a copy of a fund prospectus, please contact your financial advisor. Please also read the fund prospectus carefully prior to investing.