When it comes to poor performance in a mutual fund, how long is too long?
Evaluating the performance of a mutual fund is a bit different than evaluating the performance of an individual stock, chiefly because of the time frames involved. Mutual-fund investors should actually evaluate the performances of the funds they hold over a longer time period than they might use to gauge the returns generated by a stock.
Let's face it: Six-month or one-year returns on a mutual fund aren't terribly significant in a long-term portfolio that is based on a well-conceived allocation plan. Short-term weakness could just be a sign that the particular sector in which a fund invests - or even the fund's particular investing style (growth, value or momentum, for instance) - is currently out of favor.
[mm-toolbar] That weakness may well be offset by another fund in your portfolio that is targeting an in-favor investing style or a strongly performing sector. And this situation could easily change or even reverse itself as economic or market conditions change.
Viewed in the perspective of your entire portfolio, three-year and five-year performance trends are better gauges of a mutual fund's merit. That's why many experts say its worth waiting for two years - or even three years - to see if a lagging mutual fund can improve its performance.
Of course, if one of your funds suddenly begins to show weaker relative performance, this focus on the long term shouldn't preclude you from taking the time to figure out exactly why one of your funds is suddenly doing poorly. Here are four of the most common reasons a fund's performance can suddenly change - often for the worse.
Consider these four as "mutual-fund warning signals." Be concerned if:
[Editors' Note: For the main story on defensive-investing strategies involving mutual funds, please click here for Part I, which appeared yesterday (Monday), and here for Part II, which appears elsewhere in today's issue of Money Morning. For other stories in Money Morning's "Defensive Investing" series, please click here.]
News and Related Story Links: