Give your funds room to breathe

Your Funds

Your Money

August 22, 2004|By CHARLES JAFFE

LARRY FROM Scottsdale, Ariz., was trying to compliment me recently, writing that he reads my column every week, "right after I see how my mutual funds are doing."

The backhanded slap in that statement is that if he pays attention to this column each week, he wouldn't peek in on performance each week.

While mutual fund data is available around the clock, the average investor is ill-prepared to analyze and act on information with that kind of frequency, or even Larry's weekly charting.

That doesn't mean that people like Larry don't try. The Arizona retiree has about 30 funds and rebalances or fine-tunes his deposits on a monthly basis, charts his results weekly and has computer services set to alert him to any news relating to the issues he owns.

At least some of that behavior is self-defeating. Too many funds and too much activity, no matter how well intentioned, can backfire.

Managers you trust

The idea in mutual funds is to get professional management and diversification at a reasonable price. Finding a manager you can trust enough to sit tight for awhile is crucial to the process. Examining your funds too frequently is a sign that you lack confidence in the investments.

Larry is far from the only investor whose actions may get the better of him.

On a recent Suze Orman Show on CNBC, the host told a fan who asked how often to review investments to "check on [mutual funds] at least once a day to make sure that the manager is still the same, that nothing has gone wrong ... ."

The suggestion that an average investor with a long-term view ought to inquire of their funds daily is ludicrous.

In Larry's case, he checks his funds weekly so that he can chart them - "I only want to see the trend," he wrote in an e-mail exchange - and not because he is looking to make changes.

In Orman's case, the clear suggestion was that investors should dump funds after a fund changes managers. "Nothing gone wrong" sounded like a euphemism for "lost money today."

While funds occasionally issue press releases when there has been a manager change, they are allowed to announce those moves in semiannual paperwork or not at all. You can't necessarily learn about a manager's departure by calling every day, and your daily effort is likely to be an effort in futility for years.

Moreover, a manager change should put a fund on your "watch" list, not on your "dump" list. Generally speaking, new managers should get at least six months to show whether they can maintain or improve results.

Reviewing your portfolio too often makes ordinary market moves look like something "gone wrong." If that spurs a move, your replacement fund almost certainly will be one where recent days have gone right.

Buying hot, selling cold

That will have you buying what's hot and then selling it once it cools - the antithesis of the result fund investors should be trying to achieve.

The frequency with which you should review holdings varies based on individual tendencies, but here are some guidelines that make sense:

Open every statement and take at least a passing glance.

While I have said for years that I review my portfolio twice a year whether I need to or not, I do open statements to make sure that regular deposits went off without a hitch. Over the course of months, it becomes easy to get a feel for a fund's trading range and cycling tendencies without getting freaked out by any spiky moves. Give statements a passing glance, don't lose half-hours on them.

Review every new prospectus and semiannual report.

This is where you might uncover a management change. It's also where you learn whether a fund is changing how it manages money, what kind of securities it buys, or its cost structure.

Examine your portfolio as a whole at least once a year, twice if you can stomach it and quarterly if it doesn't make you too nervous.

By looking at the portfolio in its entirety, you can see where market action has put you off your asset allocation. Rebalance your holdings or change your deposit pattern when your asset allocation is more than 5 percent away from target levels.

Look often enough so that you are not surprised, but not so often that you feel a need to do something to react to short-term events.

If you open a statement and are shocked by what you see, you're not looking often enough. If you can't ballpark what you have invested in a fund, you may not be looking often enough. But funds are supposed to simplify your investing life, not complicate it, so look for investments you are so comfortable with that you don't feel you have to re-examine them too often.

Charles Jaffe is senior columnist for CBS MarketWatch. He can be reached at jaffe@ or Box 70, Cohasset, Mass. 02025-0070.

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