Preserving Your Portfolio - Page 4 of 8

Preserving Your Portfolio

energy to structure their own portfolios, Exchange Traded Funds are available. Index funds are also a way that you can kind of avoid a lot of the scandal-plagued funds that have been in the headlines recently. For those investors who have big retirement assets in funds, you can put them in ETFs pretty easily, without any major costs. ETFs trade like stocks. There are some disadvantages in that you pay a broker’s commission so they are better for lump sum distributions, as opposed to dollar cost averaging; but, because they are passively traded, you can pretty much gain exposure to any sector and the expense ratios (fees) are very low. They are also very tax efficient.

BATTS: Going back to what you were asking about the mutual funds, I think you have to classify people into maybe two different categories—those who may want to invest on their own and those who would invest through a vehicle, like a mutual fund. For the individual who would like to invest on his own, I believe that, as Warren Buffett cautions, if someone knew that they could make only 10 investments in their life, they would take the care to research, and to understand what it is that they are buying. And I think that they would probably, once doing that research, be able to have the patience to see it come to fruition. If they can only make a few selections, why would they choose this stock over the rest of the stocks in the universe?

B.E.: Are you suggesting that consumers should use that same approach to pick a mutual fund now?

BATTS: No. In terms of an individual investment, I think they should select stocks as if they only had a limited number of picks so that they would do that research. For investors who may be inclined to look at a fund, there are several things that they should take a look at. They should take a look at expense ratios. They need to take the time to read the disclosure statements, to understand what the trading policy is, especially with respect to late-day trading—particularly in international funds, which have been in the news lately. Does the fund have a policy to monitor trading within their fund? Some funds have policies that once you go into the fund, you cannot exit the fund without a substantial disincentive. But, at the end of the day, I think they also want to take a look at, obviously, the performance, and not the performance in 2003. If it’s an equity fund, they want to take a look at how the fund has performed in a bear market as well as how it has performed in a bull market; to take a look at its three-, five-, and 10-year record.

B.E.: What should an investor look for when they want to get out of a fund?

BATTS: I think they should assess that downside risk [of the fund] and, if a fund goes below whatever their threshold