a change in a manager’s style, or a purchase of companies you already hold in another fund, he says. Broussard also recommends exercising caution before pulling the trigger on a fund. “Investors can get hurt by changing their investments too frequently,” she says. “The long-term performance of any growth fund is likely to be good. However, the return to an investor might be entirely different. You might move out of a fund that has dropped a lot but find that you’re getting out at the wrong time, just before the fund rebounds.”
One of Broussard’s clients, Sheila Lunderman, a purchasing manager for Honeywell in Rocky Mount, North Carolina, has found a way to avoid this mistiming temptation. “I’ve learned not to watch my mutual funds everyday,” she says. Indeed, she learned that lesson the hard way. Now 39, Lunderman made her first mutual fund investments 15 years ago — just before the October 1987 stock market crash.
“I trusted that the market would come back,” says Lunderman, “and it did. Indeed, my funds did very well in the 1990s. The current bear market has been more disturbing, though. It’s tough to see your stocks go down for years. Nevertheless, I have mutual funds in all categories, so I haven’t been hit as hard as people who put all of their money into technology stocks and tech funds.”
Even for patient investors, there are times when moving in and out of certain funds makes sense. “I don’t sell funds that have been hit hard in any one quarter,” says Wilkinson. “I buy funds with a good record, over three to five years, and if their performance has been below their peers, I give funds a few quarters [to rebound] before deciding to sell.” This year, Wilkinson moved out of Vanguard S&P 500 Index fund, dissatisfied with its results since 2000. She reinvested in UBS International Equity Fund (BNIEX) for more international exposure.
Other investors take an even more aggressive approach to bailing out of disappointing funds. “I’m in for the long run,” says Richardo Kilpatrick, 50, of Auburn Hills, Michigan, “and I realize that my funds will go up and down during that time. Still, I read all the documents I get from my funds and I meet with my financial advisor every two months. I believe in three strikes and you’re out. If we have three straight meetings where a fund is not performing well, with returns below the other funds in its category, I’ll sell.”
Kilpatrick’s advisor is Arvai, who suggested some portfolio changes early this year. Firsthand Technology Value fund, which had been a top performer, has been jettisoned. “The entire tech sector had been under pressure and likely to remain weak,” says Arvai.
The proceeds from Kilpatrick selling Firsthand Technology were spread among three funds. “Westport Select Cap R Fund (WPSRX) and Royce Low-Priced Stock Fund (RYLPX) give him more exposure to the small-cap area,” says Arvai. “In addition, he bought Columbia Real Estate Equity Fund (CREEX). We’re aiming for a 5% allocation