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194 Step 9: How Ya Doin’? houses or fund firms typically report only the value of the investment in a given fund. That doesn’t tell you much about how the fund is doing. It is almost impossible to know where you’re at in your game plan if you cannot evaluate performance of a fund in comparison to the market benchmarks and other funds in its style category. To get this information, you’ll need to do some basic (and relatively easy) legwork on your own. You want to know how each fund has performed on a year-to-date basis, as expressed by the percentage change in value for that time pe-riod. (If it’s very early in the year, consider comparing to other like funds by looking at the trailing one-year returns.) You also want to be aware of how each fund is performing in comparison to other top funds in its fund style. As we’ve discussed earlier, this information is available in most newspapers (Investor’s Business Daily, the Wall Street Journal, Barron’s, or the New York Times) or online on many financial web sites (www.morn-ingstar.com and http://finance.yahoo.com). What kinds of changes in fund performance should you be con-cerned about? Typically, a red flag goes up for me when I see a fund that is doing 10 percentage points worse than other top-performing funds in the same style. For instance, if the best large-cap value funds are down 5 percent from the beginning of a year and the large-cap value fund I am using is down about 15 percent, I know the manager must be having a problem. Now that doesn’t mean I drop that fund right then and there. As any good coach will tell you, you have to give plays time to develop. Apply-ing that concept to mutual funds means that you need to have some pa-tience. Good managers will run into rough patches from which it may take them as long as a year to recover. You have to be careful to differen-tiate between a manager who is temporarily underperforming and one who has lost his or her ability to perform on a longer-term basis. Deciding the difference between these two situations is very difficult. Your twice-monthly tracking may give you a heads-up on a problem. You can also get information by reading the financial press’ coverage of your funds, as we discussed in Chapter 6. Additionally, if you have questions about your fund you can’t answer, you can call and discuss concerns with your mutual fund sales representative. Get the Routine Down: Tactical Assessments 195 If you’re still concerned about the fund, it may be time to sell. While there are no hard-and-fast rules when it comes to deciding to dump a fund, there are two triggers that generally guide me to sell. Ideally, it is an action not done lightly or quickly but an informed judgment call made after watching a fund’s performance over a 6-to-12-month period. The first sell trigger is when it becomes apparent that you are obvi-ously uncomfortable with the degree of risk of a particular fund. This may not be obvious at first. For example, during the bull market you may have been invested in one of the many funds that were technology-heavy. As your fund dropped and rebounded like a yo-yo, you weren’t sure what to do. On the days it rose, you felt better. When it fell, you felt sick and couldn’t sleep. When a fund’s volatility begins to affect how you feel, it’s time to sell. The second trigger is a quantitative measure. Remember I said that a red flag goes up for me when a fund underperforms by 10 percentage points in comparison to the top funds in its style? Well, if that fund con-tinues to slide and is down 15 to 20 percentage points more than the best funds in its style on a year-to-date basis, it’s generally time to sell. There may be serious issues that call for getting out of the fund. In addition to the short-term monitoring, your tactical assessment should also include an overall performance report for your total portfolio. I suggest you do this on a quarterly basis. What should you track? You should consider how much money you started investing with originally as well as what you started and ended with in the period you’re monitor-ing. It should also show what percentage gain or loss you’ve had in your portfolio over that term. A sample of the type of report you might ideally use is shown in Table 9.1. This is a streamlined version of the report I give my clients every quarter. In summary, both the twice-monthly tracking of your funds and the quarterly monitoring of your portfolio will help you keep abreast of how your funds are doing on a tactical basis. While this is a challenging task, it can act as an early warning system for problems that might be developing. Just don’t react too quickly to downswings. Carefully evaluate the fund’s situation as well as the overall sector and market. 196 Step 9: How Ya Doin’? Table 9.1 Quarterly Performance Report Beginning Portfolio Value on March 31, 2002 Additions Withdrawals Ending Portfolio Value June 30, 2002 Net or original amount invested (principal) Gain/loss from net amount invested (principal) % Return for both quarter and trailing 12 months $____________________ $____________________ $____________________ $____________________ $____________________ $____________________ _____________________% The reason for short-term tracking is to make sure the mechanisms (funds) that ultimately work together to achieve your long-term plans are not getting derailed. Think of the process as you would the checks and repairs that engineers routinely make on a train starting a cross-country trip. For safety’s sake, the trains have to be consistently checked, and sometimes the moving parts have to be replaced at various station stops along the way. But the overall journey goes on. Now that you have an idea how the monitoring and tracking of your funds work, let’s talk about the broader subject of reviewing your game plan. Strategic Reviews The second step in your evaluation process is a broad-based strategic re-view of your overall allocation strategy and goal(s). This should be done at least once a year. It’s often easiest to do in January as you prepare your taxes because you’ll have the previous year’s data to look over. But pick any date that works for you. Your birthday, the start of the school year, or summertime when your business is slow. Just be consistent: Pick it and stick with it! Strategic Reviews 197 There are two parts to this element of the process. First, you need to check in and determine whether the overall investment game plan is still sound. Second, you need to determine whether any changes in your per-sonal situation necessitate a change in your strategy. Use these two check-lists to evaluate your overall investment game plan and personal situation. Investment Checklist • Is the plan meeting your goal of a certain return rate? (You estab-lished your return rate when developing your goals in Chapter 3.) For your overall portfolio, meeting your return rate is more impor-tant than a comparison to any one benchmark. • Is the allocation between stocks, bonds, and cash still appropriate given your tolerance for risk? Has it felt too risky, not risky enough, or just about right? If it was too risky you may trim back the offense and add a bit to the defense. Or, if not risky enough, you can do the opposite and increase the offense. Do you feel you need to take the risk test again? • Are your portfolio’s allocation levels to the various asset classes and fund styles still appropriate given the market conditions? For example, when growth funds became overvalued in 1999, you might have wanted to decrease the percentage you had invested in growth and increase your allocation to value funds. You might make changes like these through the year, but this strategic review process assures that you will check out allocation levels at least once a year. • Do you need to trim back or add to your investments in any of the funds in order to make your fund styles and asset classes match your strategy? • Is the inflation rate you assumed in your planning still valid? Personal Checklist Some changes in the structure of your personal life can require you to ad-just your game plan. You need to determine whether the assumptions 198 Step 9: How Ya Doin’? about your life that you used to create your original plan remain intact. Here are a few issues to keep in mind: • Has the date you expect to retire remained unchanged? • If you’re not retired yet, review your retirement goal. Has any-thing changed that will affect the annual income you’ll need at retirement? • Has the amount of money you assumed you could invest each year changed? • Did you have any personal losses or gains (such as in a business or a death) over the period that could affect your planning? • Do you have enough money in reserve for emergencies and con-tingencies? • Did you discover anything new about yourself that could affect your game plan? Time Out to Consider Rebalancing Any action you take affects your overall game plan. Some planners think you should tweak your portfolio to stay loyal to the precise contours of your original game plan. In the jargon of the business, it’s called rebal-ancing. This is a concept that is the subject of much debate in the indus-try. Rebalancing means that you react to one asset class growing and another shrinking by acting to maintain your original allocation per-centages. As a general rule, I think rebalancing is a good idea. It forces you to sell high (the asset that has moved up the most to cause the imbalance) and buy low (the asset that is out of favor and cheaper at this time). Imagine if you had done that at the end of 1999 when there were out-sized gains in many stocks. You would have trimmed back to your origi-nal stock allocation by selling at a high and investing in bond funds going into the year 2000. Rebalancing at that time would have put you in much better shape to withstand the impending crash. Now let’s look at a hypothetical portfolio and consider whether re-balancing makes sense. Let’s assume you started out one year ago with ... - tailieumienphi.vn
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