What Is the Best Way to Oversee Your Fund Portfolio?

By Tom Madell, Publisher and Editor of Mutual Fund Trends and Research

Not too many people probably give much thought to the question raised in this article's title. In fact, few mutual fund investors may even be aware that at least a little on-going watchfulness over your funds may be crucial, except perhaps if you are still in your 20s (or maybe 30s) with too many other seemingly more important things to consistently grab your attention.

Especially with today's volatile markets, reasonably justifiable apprehensions about the direction of the world economy, and looming projections for subpar long-term stock market performance, it hardly seems to make sense that a sound strategy would continue to be barely attending your portfolio at all, as suggested by many mutual fund experts, and apparently accepted by the majority of investors. In fact, a new academic study suggests that due to the large number of baby boomers approaching retirement, the overall direction of the stock market could be down by more than 50% over the next decade and a half, according to a Dec. 1st article in the NY Times!

According to the "don't pay any attention to market fluctuations" theory, these types of ups and downs can't reliably be spotted and will merely average out over the long term. But, I, like the authors of the study cited above, believe that downturns where certain investments are out of favor, can at least be somewhat anticipated, and therefore, should be factored into the decisions you make about your own portfolio. Realistically, had most investors been practicing some minimal oversight during the 90s bull market, they would most likely have taken certain steps to ensure that their portfolio wouldn't be totally devastated in the event of a major bear market which did subsequently ensue.

So what should an investor such as yourself, who at least cares enough about their investments to be reading a source of financial information such as this, do when attempting to oversee their fund investments? Here is my short list of suggestions:

• Do not be paralyzed into inaction. According to a study by Hewitt Associates as reported in the Jan.-Feb. 2003 issue of My Generation magazine, fewer than one in five participants in 401(k) plans have altered their investment choices whatsoever in either 2001 or 2002, as compared to about one in three in 2000.

  This suggests that people are more likely to take notice and act on their portfolios when they think that the market is "hot" than when stocks are falling, during which times they "clam up", often deciding to wait out the downslide. But when the overall market is falling, there are often good opportunities in other types of investments such as bonds, and "alternative" categories of stocks such as has been true, for example, with real estate funds for the last few years.

   

• It can make some sense to sell, or at least cut down on losing funds, even well into an extended downturn. Here is a good example:

  After continuing to buy a mutual fund that invests mainly in Japanese stocks for several years in the mid to late 90s, I realized that just because an investment category is off 50 or more percent as Japanese stocks had been over the prior 10 or so years, doesn't mean they will necessarily come back any time soon. So I not only stopped buying this fund, but I gradually reduced my position, re-deploying the freed up cash to other more promising areas. Needless to say, Japanese shares have still not rebounded and my money has done better elsewhere. One should not readily rule out the possibility that such a similar situation might also be in store for some US stock categories.

  Generally speaking then, trends are your friends. Until proven otherwise, do not assume that any trend will quickly reverse itself. However, do not invest in categories of funds that have been going up year after year and that have become overvalued. One way of spotting overvaluation is to get data on the PE of a fund.

   

• Especially if your research time is limited, continue to seek out sources of trustworthy information that can help advise you on making reasonable decisions. I believe you will find my Mutual Fund Trends/Research Newsletter available on this site among such valuable sources that may be helpful in guiding you to make your own prudent portfolio decisions.