Get portfolio in shape for next season

Your Funds

Your Money

February 15, 2004|By CHARLES JAFFE

BEFORE the New England Patriots Super Bowl victory parade was over this week, fans were speculating on what the team could do to upgrade itself for next season.

The process that any team - championship or otherwise - goes through when a season ends is not dissimilar from what an investor faces in reviewing a fund portfolio.

They key difference is that in sports most of us can only be a part of the "fellowship of the miserable," University of Louisville coach Rick Pitino's description for the yakkers on talk radio.

With your fund portfolio, you are coach and general manager.

Your year-end statement is the box score and statistic sheet. It tells you whether you are a winner or loser, but the most important season is always going to be the one that lies ahead.

With that in mind, consider how the Patriots' brain trust is sizing up talent for next season and how you might use the same characteristics for your funds. You'll want to look at several attributes for each player.

Ability

The most basic evaluation on a team is, "Can this guy still get the job done?"

It's the same question you should be asking about each of your funds.

Size up a fund's returns relative to its peers, because you can always go find a free agent.

Beyond returns, however, make sure the fund is still doing the job it was meant for. Many funds start out as small- or mid-cap offerings but change as they succeed and attract a flood of new money.

If you bought a fund to be the aggressive player in your portfolio and it has lost a lot of its teeth, you could be looking at making a change.

Fit with your needs

Football teams have players at each position, but they sometimes find weaknesses that they didn't expect.

Investors don't have to own one fund of each type - you should be able to achieve all of your financial ends with a portfolio of no more than a dozen funds - but they may come away from a year feeling like there is a weakness in their portfolio.

During the bear market, for example, investors who had shunned real estate funds suddenly realized the value of adding that asset class to their portfolio.

If there is a type of fund that you need to properly diversify a portfolio, it might be time to cut some money from another fund or to eliminate funds that overlap in the same area to fill the gap in your holdings.

Salary cap number

In football, this is the amount of a team's payroll you are willing to dedicate to one player. If a player is "earning too much," teams frequently look at renegotiating a contract to make the current terms more palatable.

In funds, it's more of an asset-allocation cap, and the question to answer is "how much money do you want to dedicate to any player on your own team?"

Your actions should have less to do with actual dollars than with the percentage of your assets that are in a certain type of fund.

The best fund investors have a plan for how much money they want in certain asset classes. Think of an ultra-simple allocation of 50 percent stocks and 50 percent bonds. In a year where one of those categories has a big year (or one has a terrible year), the allocation shifts, and the investor might wind up having a 60-40 split.

When one of your fund players has a big year, it gobbles up space under your asset-allocation cap. That puts you off your plan. Get far enough off the plan and it's time to renegotiate, rebalancing your portfolio by culling from your superstars and moving some to your plodders in order to get back on track.

Potential

In football, coaches want to know whether a player's best years might be in front of him.

The same applies for a fund. If you think a fund's best days are in the past - because of manager changes, style changes, asset growth or any other factor - it might be time to look for a fund that you think has a brighter future.

Attitude

Over the course of a season, coaches see how well a player meshes with their surroundings. Just as they need to see how a player fits into their system, you need to be certain that a fund's investment style doesn't clash with your own.

If you are defensively minded, for example, you might prefer to protect assets rather than shoot for the biggest scores possible. Plenty of investors lose sleep despite owning "good funds." Chances are, their fund team needs a change to so that it better reflects the mindset of the coach.

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