It's the time of year when you'll want to review your mutual fund portfolio to see if its performance remains on track toward your investment goals, earning about the rate of total return that you had expected without exposing you to more risk than you can accept.
If your review indicates that your portfolio isn't living up to your expectations -- or if your investment objectives, risk tolerance, or circumstances have changed since you began to invest -- you'll want to think about making some switches.
A letter from a California reader, wanting to know whether her $30,000 portfolio is appropriately invested, provides a useful example of the checks that a portfolio review might involve.
* Goals. The woman's goal is to build the portfolio, which she'll supplement with $5,000 annually, into a nest egg for "a family member that will need some financial help in about 20 years." A 10 percent annual rate of return, she figures, should suffice. (Her return for the first 10 months of 1992: 4.3 percent.
L Will a 10 percent return over the long run really be enough?
At that rate, $30,000 would grow to $201,825 in 20 years -- not, to be sure, a lot of money. If inflation would average 3 percent annually over the next 20 years and, if in 2012, her relative would have to invest in a money market fund yielding, say, 3 percent, then its $6,055 in dividends would buy only what $3,364 buys today.
Fortunately, her relative also would benefit from the $5,000 she plans to add each year. Earning an average of 10 percent yearly, too, these 20 installments would provide another $300,000 for investment.
What are your goals, and are you on the way to achieving them? Remind yourself why you've invested in funds -- whether for capital appreciation, income, or both -- what rate of total return (price change plus reinvested dividends) you require, and, if you know, for how long you plan to be invested.
* Risk tolerance. Since equity and bond fund shares could be worth less than they cost if you had to sell them in the short-run, is your portfolio vulnerable to that risk? Will you be invested long enough to ride out their fluctuations to benefit from their expected gains?
The reader, whose 20-year investment horizon and targeted 10-percent return indicate she should invest in equity and bond funds, seems to be able to tolerate volatility.
"I am a 63-year-old retired person," she writes. "My home is paid for. I am living on a widow's Social Security pension and . . . another small pension.
"If I'm careful, I think I can help provide a retirement income for someone else."
* Asset allocation. Given goals and risk tolerance, assets can be allocated among money market, bond, and equity funds. Equity funds tend to perform the best over the long-run but are the riskiest. Money market funds are the least risky but tend to offer low returns.
The Californian's portfolio is almost 25 percent in money market funds, 3 percent in a fixed income fund, 11 percent in a balanced fund, and more than 60 percent in equity funds.
The equity and balanced fund portions seem to be suitable for her purposes, but, as she has recognized, she clearly has too much money in three (two too many) money market funds.
"After doing these schedules and . . . allocation percentages . . . I think . . . the cash should be eliminated and put into [long-term] funds," she says. "This is a long-term undertaking."
* Fund switches. Her only fixed-income fund is an adjustable-rate mortgage fund, which she realizes is more suitable for those with short-time horizon. She wants to move the money to her balanced fund.
After redeeming her money market funds, she can buy a couple of investment-grade bond funds, which should serve her better than the ARM fund. They should be taxable or tax-exempt, depending on what would be best for someone in her bracket. One could have a weighted average maturity of around 5 years; the other, 10 years or longer.
Her 14 equity funds are, on the whole, good choices, even if they may be too many to follow. (She was "just trying to be safe.") Her largest account, Vanguard's 500 Portfolio, which is managed to track the Standard & Poor's 500 Index, constitutes a core holding that should always do as well or as poorly as the broad stock market. The others try to beat the index with a variety of strategies, such as concentrating in large and small company growth and value stocks. She also has included T. Rowe Price's international fund.
Five of her equity funds -- Neuberger & Berman Partners, Gabelli Asset, Nicholas, Columbia Growth, and Dodge & Cox stock -- excelled the 500 Portfolio's 7.0 percent return through Dec. 10, as did her balanced fund, Vanguard's Wellesley Income Fund, which is about two-thirds in bonds and one-third in stocks.
Her poorest performer this year, Financial Funds' Health Sciences Portfolio, may be down 13 percent, but this seems not to have shaken the lady. "Perhaps," she remarks, "it's a good time to buy more."
Having taught herself how to invest over the past two years, she looks ahead with confidence: "I know that the market will go up and down. The historical trend has been up. If you don't have to bail out in one of the down periods, it should work out OK."
1992 By WERNER RENBERG