Most mutual funds are designed to be medium or long-term investments and not traded frequently – as you might do with an individual stock holding. But occasionally, an individual fund may outlive its usefulness for your portfolio or your goals. Here are four situations that could dictate a review of a fund in your portfolio.
Your portfolio needs change. Probably the best reason to reexamine your investments is a change in your needs. It may be that you are entering a different phase of your investing life. For instance, you may be nearing retirement when your need for growth may be lower and your need for income increased.
It may also be the case that your understanding of your own risk tolerance has shifted as you have lived through different market conditions or simply to come to understand yourself better. You may have grown more or less tolerant of risk, which may mean that a fund in your portfolio is no longer an appropriate holding.
Sometimes rebalancing may also be a factor. For example, if one asset class has performed well, it may now represent too large a share of your overall portfolio. In selling down units in that asset class to come back into balance, we may decide to exit a fund altogether to keep your portfolio efficient or avoid too many or overlapping funds.
Change in fund manager. When you put your money into a fund, you are putting a certain amount of trust into the fund manager’s expertise and knowledge. A change in the manager does not automatically indicate a need for a change – most funds have a team of people inputting into the investment decisions from researchers and analysts to co-managers and investment committees. That being said, individual talent can matter and it’s worth watching the performance of the fund under its new management to ensure that it continues to perform well and continues to be managed in a way that is consistent with the role it was originally chosen for.
Change in fund’s mandate or style. Each individual fund in your portfolio was chosen to play a specific role in your overall portfolio strategy. This will include not only asset class like equity or fixed income, but also “style” such as value, growth or momentum. It may also include specific elements in its mandate such as market capitalization (small- or large-cap) or specific sectors or geographic regions.
Over time, there can be a “drift” from these elements. On some occasions there may be changes in mandates or styles as a fund company reorganizes its fund line-up. Often, but not always, a change in fund name may signal a change in approach.
Consistent underperformance. All funds will have years where they shine and when they don’t. And short-term fluctuations are part of investing. However, significantly poor performance over several years may mean it’s time to re-evaluate. If the fund has consistently underperformed its peers and its target benchmark, there may be better options available.
If you have any concerns about a fund in your portfolio, or feel it’s time to review your investment goals or strategies, let’s talk.
Larry Kleinmintz, R.H.U., T.O.T., M.D.R.T.
This newsletter is sponsored in part by Dynamic Funds. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performances may not be repeated. Dynamic Funds® is a registered trademark of its owner, used under license, and a division of 1832 Asset Management L.P.
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