The genie of the mutual fund grants only certain wishes

Your Funds

Dollars & Sense

April 06, 2003|By CHARLES JAFFE

FUND INVESTORS are wishing they had known back when they started investing what they know today. They also wish they could start over, that the market would turn around, that they could have better market timing or more patience or more to save.

That's where the genie of the mutual fund comes in.

As with any good genie, you get three wishes, but there are rules:

No wishing to get your money back. Like love - remember, every genie in every tale can't make someone fall in love - recouping your losses is something you have to earn.

No wishing for instant stock market booms or all answers in perpetuity. The market, as all investors should know, is more powerful than any genie, so turning it around or providing clairvoyant market-reading abilities is more than can be delivered.

No wishing for more wishes.

I'd love to tell you that you can rub this column and make the genie appear, but it doesn't work quite that way. Instead, you have to come up with your own list of wishes.

Start by reviewing your portfolio, examining where things work, where they don't and how they might improve.

First, identify the things that are working for you. Begin with the actual funds, reviewing not only their performance, but also how they compare with their peer groups.

You are looking to see that the fund is delivering to the reasonable expectations any buyer should have when first investing in a fund: Does it provide superior performance, compared with its competition, for a specific type of asset you want in your portfolio? In every asset class, someone has to get below-average performance. But that is not something to wish for, so if you've got funds that have proven to be less than you expected, you may want to start wishing for new funds.

While you are reviewing your funds and trying to make a wish list, look for funds that you really wish you never owned.

There are plenty of investors out there who say something like "I really wish I had never bought the XYZ Internet Fund," but who continue to hold the suspect fund waiting for a return to break-even or simply not wanting to lock in losses.

This is the kind of wish that the fund genie is best capable of granting.

Next, look at broader portfolio issues. This is where you check to see if your funds have tremendous overlap, where you've bought multiple funds expecting to get diversification but you've wound up with multiple funds buying mostly the same thing.

It's also where you review which asset classes you currently are invested in, to determine where you have holds in your current strategy.

And this is where you look for holes in your plan, asset classes that you might want to cover but haven't up to this point.

In this way, you build your wish list with types of funds that you might want to own; in general, you'll be wishing for fund types that have done well during the bear market - real estate, bonds, gold or other assets - that tended to be under-represented in the average portfolio during the bullish times.

Finally, look at the strategy that drives your investments. While every strategy has its fans, the important thing to remember is that there is no one right way to reach your financial goals.

The important thing to consider is whether you have the emotional discipline to stick with a strategy and see it through to success, so that if you want to move from a total buy-and-holder to a tactical market-timer, make sure you'll be prepared to stick with the change you are making.

One of the easiest ways to sabotage an investment portfolio is to jump around from one investment discipline to another, so wishing you were doing something new and different is not to be taken lightly.

If you are wishing for a strategy that will last a lifetime, it has to be something you can stick with that long; you don't want to be three years down the road wishing you had, say, stuck with buy-and-hold.

Armed with your three wishes - which should be enough to let you rebuild your portfolio without going totally overboard - making the genie appear is the easy part.

Go look in the mirror.

If you've been wishfully thinking of things you can do to better manage your money in funds, there's no time like the present to make those wishes come true. With good research and a solid plan, you'll be amazed at the powers you have when it comes to improving your investment performance.

Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, Mass. 02025-0070.

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