Good factors in a marriage apply to funds

Your Funds

Your Money

October 10, 2004|By CHARLES JAFFE

MY WIFE, Susan, and I celebrated our 20th wedding anniversary recently.

Within the past few weeks, we also celebrated our 10th anniversary and 15th anniversary of holding two of our favorite investments.

Anyone who knows me the least little bit understands that my wife has the patience and demeanor of a saint. I count my blessings for her place in my life every day.

But relationships with mutual funds also involve patience and understanding. While industry statistics vary, the average investor appears to be holding mutual funds for under 2 1/2 years, which means that investment couplings break up more frequently than marriages.

Beating the odds to have a lasting, successful relationship is hard, both in marriage and mutual funds. It's important not to fall in love with investments, but the average consumer should be looking for committed, long-term relationships with their funds.

That means that the ideal mutual fund is one you feel comfortable having and holding, in sickness and health, in good times and bad, for as long as you live ... or at least until the kids head off to college or you reach retirement age.

Typically, it's a love-vs.-lust issue that sours most fund relationships.

Investors are attracted by good returns, but once the initial spark is gone and that first euphoria wears off and returns begin to sag, many people believe it's time for something new.

Some people have flings with their funds, never settling down, and heading only for the best returns.

And in a diversified fund portfolio, some people look for core funds to marry, supplemented by a few hot numbers to fool around with on the side.

Still, investors should size up a fund's "marriage potential" by considering many of the same things they get in a life partner.

Before tying the knot with a fund, consider:

Common goals

Common goals and ideals are a cornerstone of a successful fund relationship. If you and the fund don't share the same goals, or the ideals on how to achieve investment results, it is a mismatch. Likewise, the fund's character - from gun-slinging aggression to passive pursuit of an index - must appeal to you enough that you'll develop the conviction to stay put during the inevitable declines.

Examining the stability that a fund can provide is important, too.

Most investors say they can stomach risk and volatility, but then have a hard time riding out the rough terrain. Check a fund's past volatility, and look at its worst performance to decide whether you could stomach a loss of that size.

True love

Avoid the quick pickups and crushes that create initial attraction but then wear off. Performance chasers marry a fund for today's money; long-term investors want more. The kind of fund you marry is one that has consistent long-term performance, never getting too high or low and avoiding the emotional roller coaster that comes with wild swings.

Family

They say you don't just marry an individual, you get the whole family, and it's true for funds and spouses.

In fund families, management often shares ideas. What's more, the longer you hold a fund, the more likely you will live through a manager change, which raises the possibility that you get stuck with a crazy, shiftless brother-in-law as a replacement.

Fidelity(And I don't mean the fund company.)

Every fund should have a defined role within your portfolio, and you want it to stay true to that objective.

If you wake up five or 10 years down the road and find that your small-cap fund has strayed into large stocks that overlap other holdings, it is a betrayal worthy of a breakup.

If you want a long-term relationship with a fund, be sure it promises to remain style pure, and check its past to see if it has strayed in the past.

Bad habits

You might persuade a spouse to quit smoking or give a shove to stop bedtime snoring, but you'll never arm-twist a fund into changing its bad habits.

Performance, like good looks, provides the initial attraction, but high expenses, excessive turnover and other conditions are not skin-deep.

A fund may be able to overcome a high-cost structure for a year or two, but probably not over a lifetime, so look for costs you can live with if you've got a long-term relationship in mind.

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