The Retirement Corporation of America

Giving Your Fund Portfolio The Once-Over

WHEN IT COMES to investing for success, you could do a lot worse than simply picking the right array of mutual funds. Favor stock funds over bond funds or cash and rebalance your funds every year or so to keep your allocation where you want it to be. Remember that when you invest in mutual funds, you have lots of company:

•  Nearly 80 million Americans in 45 million households own mutual fund shares.

•  The total value of those holdings, recently, was over $4 trillion.

•  Individuals hold nearly 80% of all mutual fund assets.

So the odds are very good that you have invested in mutual funds. The odds are good—and getting better—that your retirement savings strategy is heavily built around mutual funds. In other words, mutual funds surely play a crucial role in making you the financial success you want to be.

Unfortunately, the odds are equally good your mutual fund strategy still is a little out-of-kilter. That doesn't mean you've made mistakes with your money. It's just that what you have done so far is just a first step. Now you have to go back and review and refine your fund portfolio to make sure:

•  You own the funds you want to own.

•  You are earning the return you want to earn.

•  You have an asset allocation that works for you.

•  You re-balance your fund portfolio periodically to keep that allocation up-to-the-minute.

Filling out the table on page 4 lets you see all your fund holdings in one place ready for analysis. The next step is to look at your fund portfolio with a critical eye, asking yourself some hard questions. You want to make sure you haven't fallen into any of the:
10 Dire Traps That Cost You Mutual Fund Performance

We all make mistakes. We build a mutual fund portfolio with all the best intentions but it doesn't deliver all of the rewards we had been expecting. Use this list to see where you have stumbled. Each trap features a "What to do" to help you escape the trap and move on to better performance.

1. Your overall return isn't what you hoped it would be. You were counting on a return of at least 10% a year from your diversified mutual fund portfolio. In fact, the return is a lot less than that—maybe 6% or 7%. You feel comfortable with the funds you own, but they aren't delivering for you.

•  What to do. Start by reviewing your asset allocation. Chances are your allocation is just too conservative. All things being equal, you should have a minimum of 60% of your allocation invested in stock funds with the emphasis on growth stocks. If you have more than 10 years to go until retirement, your allocation to stock funds could run to 70% or even 80%. Bring your stock allocation to 60% or above, and your return should move up to where you want it to be.

2. Too many of your funds aren't delivering even close to what you hoped they would. You picked what you thought were strong funds—funds with solid track records, an investing style that you liked, and a manager who seemed to deliver results. Instead, you have a few good funds, but others are subpar.

•  What to do. It could be that you have made some bad choices in individual funds but it also could be the funds you have chosen have fallen temporarily out of favor. If you own a fund that is doing poorly while others of its category are doing well, give the fund one more year to catch up. If it doesn't, sell and buy a fund that is beating its peers. If all the funds in the category are doing poorly, then you must do some digging. Why is the category doing poorly? What are the prospects for a turnaround soon? If a turnaround appears to be just ahead, ride it out. If something fundamental has happened to the category (it's an Asian fund and the Asian economies are depressed), consider shifting to a category with brighter prospects.

3. Too many of your funds aren't delivering quite what you hoped they would deliver. You picked good, solid funds. Yet they always seem to be delivering a return that is a little less than you hoped for and expected.

•  What to do. It could be that you have picked funds that impose burdensome fees and expenses. The long-term performance of two quite comparable mutual funds can differ markedly because one charges shareholders 1% a year in expenses and the other charges 2% a year in expenses. Even if you didn't pay a commission to buy the fund, you may be paying a 12b-1 fee of up to 1% a year to cover marketing expenses. Review all your funds for their annual expenses. The annual expense on an international stock fund should be well under 2%, on a domestic stock fund, well under 1 1/2%, on a bond fund, well under 1%, and on an index fund, 0.25% or less. Study fund fees before you buy. Pay a higher-than-normal management fee only if the fund delivers better-than-normal performance. Otherwise, shift into funds with lower management fees. Ask about a 12b-1 fee before you buy. All things being equal, avoid funds that charge such fees.

4. You aren't absolutely sure what your funds are returning. You know in a vague way how well your mutual funds are doing, but you don't know exactly how much any given fund has returned in the past 12 months and you don't know exactly how much your entire fund portfolio has returned over the same period.

•  What to do. You aren't paying as much attention to your investments as you should. You don't have to watch what each fund does on a day-by-day basis. But you certainly want to know the performance of each fund from quarter to quarter—both on its own and in comparison with other funds of its type. You certainly want to know how much your fund assets have grown from over a year ago and what sort of return on your money that gives you. Study fund quarterly and annual reports. Study the performance as reported by Money, Kiplinger's, SmartMoney, Business Week, Forbes and Barron's. Look at the comparisons as compiled by Morningstar and Value Line—both available at most libraries and online. Learn the website address for each fund you own and check out that site on a regular basis. You can't be passive about your investments and prosper. You must keep tabs on your investments, riding with the winners and selling off your losers.

5. You aren't sure how your mutual funds are performing against similar funds. You know how much your funds have returned over the past 12 months and how fast your money has grown, but you haven't a clue as to how well comparable funds have done. Your money in a large-cap growth fund grew by 15% last year, but how does that compare with the return delivered by other large-cap growth funds?

•  What to do. Don't just check out the performance of the funds you own. Check out the performance of comparable funds. Fund comparisons are so easy to find these days, that there is no excuse for letting this slide. Once again, you can find fund comparisons reported by Money, Kiplinger's, SmartMoney, Business Week, Forbes and Barron's—plus Morningstar and Value Line. You don't want to keep jumping from fund to fund in search of the highest return. Today's hot fund can often be tomorrow's dog. But you do want to make sure that your funds are performing on a par with the competition. If they aren't for at least two years, you have some thinking and maybe some buying and selling to do.

6. Year-to-year performance comparisons are hard to calculate because you have bought and sold a lot of funds over the past year. When you try to compare how your funds rank against the competition, you keep coming up with funds you've owned for four months or eight months or 11 months. In fact, now that you think of it, you own few of the funds today that you owned a year ago.

•  What to do. Repeat to yourself and mean it: I am a long-term investor. You buy funds because you think they make sense for you. You hold them until there is some compelling reason to sell—poor performance over at least two years, a dramatic change in investing style, etc. You don't keep buying and selling on a whim because you heard about this fund at a cocktail party or that fund was on the cover of a magazine. Every study shows that buy-and-hold investors do much better over time than investors who keep buying and selling in an effort to time the market. Any fund sold less than three years after you bought it should cause you to ask yourself "why." If you can't come up with a compelling reason, repeat to yourself once again and really mean it: I am a long-term investor.

7. It's hard to keep track of mutual fund performance because you own so many funds. You want to keep up with your funds but you own so many of them that it's hard. Each time you read about a hot, new fund, you buy it. You don't just have one aggressive growth fund, but three—and a technology sector fund as well. Sometimes, you can't even remember all the funds you own.

•  What to do. You want to own enough funds to be adequately diversified but not so many that managing them becomes an impossible burden. You certainly don't need three of four funds from each category. Here would be all the funds you need to own—spread out over your tax-sheltered retirement plans and taxable investment accounts:

- Large-cap growth.

- Large-cap value.

- Small-cap growth.

- Balanced or income fund.

- International stock fund.

- Long-term bond fund.

- Short- to intermediate-term bond fund.

- Money market fund.

- One or two specialized funds in technology, health care, financial services or real estate.

8. You find yourself holding lots of very specialized funds. Some of the 7,000 mutual funds in existence cover a broad universe—all large-cap growth stocks, for instance. But some cover a very narrow slice of the world: only technology stocks or only real estate investment trusts or only companies doing business in Russia. It's okay to hold one or two of these highly-specialized funds, often called sector funds. But they tend to be more volatile than more broadly diversified funds and trouble with one or two companies in a sector can send a sector fund tumbling.

•  What to do. Use sector funds sparingly, if at all. You might want to participate in the technology boom with a technology fund or take advantage of real estate with a real estate fund. You might want to place a small bet on the future of the Japanese economy. If so, buy a sector fund in that area. But understand the risks of sector funds. Watch them closely and don't be afraid to sell if the sector is heading into trouble. Be quicker to sell a sector fund than a more diversified mutual fund.

9. You really haven't done much to coordinate your taxable and tax-sheltered investing. The point has been made again and again in Successful Investing & Money Management that you take the best of what your 401(k) has to offer and fill in the gaps with funds bought outside the plan. The point has further been made that you are sharing more of your rewards with Uncle Sam than you should if you don't draw lines between which funds should be in your tax-sheltered accounts and which fit best in your taxable accounts.

•  What to do. Strike the best balance between your taxable and tax-exempt accounts. You would:

- Put investments paying the highest income in your tax-sheltered retirement accounts because they will grow tax free, year after year with none of that income lost to taxes. That would include bond funds, income and balanced funds.

- Put investments with the best growth potential in your taxable investment accounts so when you do sell, that growth will be taxed at the favorable capital gains rate. That would include growth stock funds.

10. You find that you just aren't adding as much to your mutual fund holdings each year as you would like. Your goal is to see your nest egg grow by $15,000 a year—based on what you have added and what your investments have returned. That's how much you need to finance the future you have planned for yourself. Somehow you never make it. Each year you fall short, which saddens you and makes you anxious about the future.

•  What to do. You promised yourself that you would make building your nest egg your top financial priority—even if it meant spending less and saving more. Are you doing it? What percentage of your income are you saving? Anything is better than nothing, but 10% of take-home pay saved per year is a worthy target. Are you contributing all you can to your 401(k) to take advantage of whatever matching contribution your employer makes? Have you invested aggressively enough to bring in a return of at least 10% a year? Are the funds you own the right ones for you?

How Many of These Traps Have You Fallen Into?

Take this test based on the 10 dire traps that cost you mutual fund performance. How many of the traps have you fallen into? Is your performance sub-par? Do you own so many funds it's hard to keep track of them all? Do you buy and sell funds on a whim?


1. My overall return isn't what I hoped it would be.
2. Too many of my funds aren't delivering even close to what I hoped they would deliver.
3. Too many of my funds aren't delivering quite what Ihoped they would deliver.
4. I am not absolutely sure what my funds are returning.
5. I am not sure how my mutual funds are performing against similar funds.
6. Year-to-year performance comparisons are hard to calculate because I have bought and sold a lot of funds over the past year.
7. It's hard to keep track of mutual fund performance because I own so many funds.
8. I own lots of very specialized funds.
9. I really haven't done much to coordinate my taxable and tax-sheltered investing.
10. I'm just not adding as much to my mutual fund holdings each year as I would like.

Decide which traps apply to you. Be absolutely honest with yourself. Then sit down with your spouse, and anyone else you turn to for investment help and advice, and talk through what has to be done to escape from the trap. It's no sin falling into one or more of these traps. Even veteran investors do. The sin is in knowing what you are doing wrong and not doing anything to correct the situation.