With the stock market losing ground, it is important to evaluate your investments and make sure that you are in good solid investments. What if you find a fund with big losses? When do you dump that loser mutual fund? There are some red flags that you need to monitor that will help you know if your fund is in trouble or if the losses are just market related.
Mutual Fund Red Flags
(1) Did the fund change money managers? I think that this is one aspect of your mutual funds that needs to be monitored very closely. Chances are that if you do get a new money manager, the fund might be managed differently. If the management of your fund changes, keep a close eye on the performance.
(2) Did the fund close to new money? Mutual funds that get too large and potentially unmanageable will close their doors to new investors. This can end up being problem for investment performance going forward. Morningstar performed a study back in 2003 where they looked at mutual funds that had closed and prior to closing were in the top 20% of their category. Over the next three years, 75% of those closed funds went from tier performance to average performance. Why does that happen? There could be a number of reasons. The bottom line is that it is a red flag that you want to watch.
(3) The fund manager is in a slump – Bill Miller, the acclaimed mutual fund manager who outperformed the S&P 500 for 15 straight years, can tell you about how a slump feels. Well his streak ended in 2005 and the last positive year he had was 2006 with an underperformance of 5.9%. In 2007, he lost -6.7% and through the first quarter of this year, he was down a horrible -19.7%. Money managers do go through slumps. When in a slump, people take big risks. If you think that your money manager is in a slump, keep up on the performance.
(4) The fund changed their investment style – There are two main types of investment styles. For the most part you are either a growth or value manager. There is even an investment style that is a blend both of both growth and value. In some cases, you will see the fund manager change their style from one growth to value or vice versa. This can end up hurting performance.
(5) The fund is performing in the lower percentile of the peer group - You always want to know how your mutual fund is performing in comparison to other mutual funds that invest the same way. This is measured on a daily, weekly, monthly, quarterly, annual, etc. basis. Ideally, you want your money manager in the top 50% of their peer group. However, when you start to see the performance slip to the 75%, 80%, or 90% and greater of their peer group, there are problems. This is the biggest red flag of them all.
The best way to monitor any of these red flags is through http://www.morningstar.com/. You can look up everything from category rankings to investment style change. You can also sign up for alerts to notify you if news comes out on the mutual fund.
You don’t want to just hold and hope that the investment comes back. Have good reasons for holding onto an investment and remember, hoping and crossing your fingers that all be well is not an investment strategy.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
