What your dog can teach you about funds

Your Funds

May 28, 2006|By CHARLES JAFFE | CHARLES JAFFE,MARKETWATCH

I've talked to some men and women who can't decide if they should be amused or offended by Clare Staples' popular new book Everything I Know About Men I Learned from My Dog.

Staples isn't so much comparing men to canines, but rather talks about how the techniques she learned about handling her dog can also be used to train a human companion.

I'm not going to comment on the validity of the book, other than to say I think the premise might have been better applied to mutual funds.

Having been seriously attacked by a dog as a child, I only came around to having one in my family two years ago. The childhood experience inspired me to work closely with the dog, so that I could develop faith, trust and confidence in the relationship.

In that way, working with dogs and with funds is similar. Many investors still feel like their savings was attacked by their funds as the bull market of the 1990s ended, and while those same investors reach out to funds today, they do it tenuously, much the way someone who has had a bad experience with a dog finds it hard to trust other animals.

Here are some of the lessons from Staples book -- and a few of my own -- applied to funds.

Things your dog could teach you about mutual funds include:

Don't change your life for your fund. If you are a buy-and-hold investor and you buy a fund that suddenly has you trying to get updates every day and obsessing over daily fluctuations in your portfolio value, you are letting the fund have too much control over your life.

Whether you are a long-term holder or a trader in funds, any issue that makes you change your basic instinct and behavior is a bad fit.

Sometimes, a short leash is just the thing. There's a difference between "buy and hold" and "buy and forget about it."

When a dog doesn't act the way you expect, bringing it up short may elicit the behavior you want. Shareholders can't yank a leash and make a fund manager smarter, but they can show their disappointment by moving their money elsewhere. The good thing is that, unlike a dog, you don't adopt a fund for a lifetime; if a fund behaves badly for long enough and doesn't take steps to improve its behavior and performance, it really is acting like a mangy dog and you want no part of it.

Reward good behavior by giving the fund what it wants. With the exception of a few funds that close their doors to existing shareholders, funds don't want treats. They're after your money.

That said, they deserve it when they perform up to your expectations. The more they prove their ability to deliver, the more you can trust that downward blips in performance will be short-lived and that the fund is not going to bite you in the assets.

Dogs - and funds - don't always play well together. You may have a calm, docile dog, but that doesn't mean it won't occasionally come across another animal where all the two can do is snarl and snap at each other. The same goes for some mutual funds, typically ones that have big overlap.

During the bull market, many investors owned several funds that were heavy in technology. When the market turned, all of those funds turned ferocious and the portfolio was shredded.

This is a lesson to keep in mind when you pick a fund, because if you only discover after it becomes a problem, your portfolio will bear the teeth marks.

Dogs and funds both need their space, but will come back to you. You shorten the leash on performance, but you take a fund off the leash if the manager proves that they can deliver by moving the portfolio around a bit.

Some investors want funds to serve such a specific job that they are constantly frustrated when management tilts a bit more toward growth or value based on market conditions. If you only want funds that stay straight on line with their intended purpose, stick with index funds.

If you fear the bark, fear the dog. This is about your gut feeling, more than the fund.

Plenty of dogs - my own included - make a lot of noise without creating real trouble, but that doesn't mean you should go out of your way to pet them if it makes you uncomfortable.

Likewise, investors may be intrigued by funds that put up big numbers, but may fear a fund's history of volatility and performance swings. If the fund's potential to turn on its master makes you skittish, go with that feeling, and find an issue that you'd truly want as a financial pet.

jaffe@marketwatch.com

Charles Jaffe writes for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.

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