Don't kick yourself for bailing out It's appropriate to sell if risk leads to anxiety

Mutual funds

October 11, 1998|By CHICAGO TRIBUNE

In the mettle-testing world of stock market investing, individual participants are coached repeatedly to "Be like Warren."

That's Buffett, of course, the billionaire investor whose buy-and-hold, in-it-for-the-long-term strategy has evolved into the guiding principle of mainstream investment advisers.

All well and good, say several market experts, as long as the average investor doesn't take it to the extreme, holding an ailing-but-beloved investment until it comes to a bitter end.

Particularly in times like these, when the market is volatile and many investors are rethinking their appetite for risk, it is important that mom-and-pop investors realize there are times when selling stocks or mutual funds may be a perfectly appropriate move, experts say.

"As a general trend, we are in favor of long-term investing," said Olivia Barbee, an editor with Chicago-based mutual fund research firm Morningstar Inc. "But you need to be comfortable with your investments.

"If your investments are making you nervous or surprising you, if your losses are too steep -- far more than you can stomach -- then selling may be a good thing," she said. "But use it as a lesson going forward so you do not make the same mistake over and over again."

Knowing when to exit is never easy, even for managers of mutual fund portfolios, whose careers rest on their ability to make intelligent buy-and-sell decisions.

But there are some fundamental factors to weigh, say some fund managers as well as other investment experts. And they all relate to an underlying question: Is your expected return worth the degree of risk you are taking?

To find an answer, you'll need to assess honestly your feelings, holdings and overall market conditions. Sizing up your ability to tolerate the risk associated with your investments is a good starting point.

"When people come in and first do their portfolios, they are real risk-tolerant," noted Gary Mandell, a financial planner in Chicago. "But in the last couple of months, I've gotten a lot of phone calls from people who have decided they are not as risk-tolerant. They had never seen the market go down 500 points in a day."

No need to kick yourself for having a change of heart. Such shifts are experienced even by such investors as Barbee, managing editor of the monthly Morningstar FundInvestor publication.

She said she eliminated two emerging-market funds from her personal portfolio in the first half of this year "when I realized losing 30 percent in a fund in consecutive years was more volatility than I was willing to take on."

Assuming you can stomach the risk in your portfolio, you still may want to consider a change if a specific holding is out of sync with its peer group.

"Any time an investment surprises you, it's a good time to sit back and evaluate why you are holding it," said Barbee, expressing a sentiment echoed by a number of portfolio managers.

"We rethink why we bought a stock in the first place," said Ken Kailin, manager of the Skyline Small Cap Value Plus fund, based in Chicago. "We ask ourselves, 'If we didn't already own it, would we still buy it?' " he said. "If the answer is no, we sell the stock. If the answer -- despite the price coming down -- was we would still buy it, then we'll go in and buy more."

To assess a company's prospects, it is essential to examine its fundamentals, said Kailin and two other portfolio managers interviewed for this report. This means sizing up its financial condition, its management and its competitive position within its industry.

"If you see sales growth slowing, or return on assets or equity declining, these are signs that fundamentals are breaking down," noted David Brady, co-manager of the Stein Roe Young Investor Fund, based in Chicago.

He recently sold Tupperware Corp. and Analog Devices Inc. because he felt weakening demand in troubled Asian markets would damage the companies' returns.

Earnings shortfalls, delays with new products or competitive difficulties all can signal trouble, said Jeffrey Lindsey, manager of the Putnam Growth Opportunities fund, based in Boston.

If fundamentals have changed, or if you misappraised them when you bought in, it's probably time to put aside emotions and give up.

"One of the worst things you can do is hold on and wait for it to go back to your original cost before you sell," said Brady, who also manages the Stein Roe Large Company Focus Fund.

Pub Date: 10/11/98

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