Investment Newsletter #14 (Dec. 12, 1999)

Tom Madell. Copyright 1999

Should You Dump Your Laggards?

With the year drawing to a close, it's often a good time for each of us to look back and reflect. What might you have done differently during the past year?

It matters not what type of situation we are reflecting upon. In each case, we try to identify problem areas and then focus our thoughts on how we might improve the situation. But since there are few guarantees in life, we can never be sure in advance if we try something new, whether the outcome will indeed turn out better.

The same can certainly be said with regard to managing one's mutual funds. Often potential changes we might make with our portfolio are relatively easy to spot. But would such changes turn out to be advantageous or not? Only time will tell, but we do have some suggestions.

Changes to Consider

There seem to be two types of changes that are particularly prevalent with investors at this time of the year:

1) By now, you quite likely have concluded that one or more of your funds is likely to end the year going nowhere, or worse yet (although less likely this year), will actually end in the red. Or, even if one or more is not strictly speaking doing badly, it may be well behind the major benchmarks. Or, finally, even if doing relatively well, it may be nowhere near the eye catching performance of other stand-out funds within its same fund category. So, the most obvious type of change that you might be contemplating is to dump the lagging fund.

Each of the above types of disappointment affects different people in different ways. Some investors are sensitive to even the slightest signs of underperformance while others are more willing to take a fund's relatively bad year as a normal part of the investing experience.

2) The second type of change is the flip side of dumping the laggards: Why not go for the gold? Why not jump more heavily aboard some of your brightest winners? And, if none of your present funds seem to quite measure up, why not seek out one or more entirely different funds that have widely been recognized as star performers?

When exercised together, as these portfolio changes often are, we can refer to this strategy as one of "dumping and jumping".

Discrepant Performances

Discrepant performance between funds and the major benchmarks seems to have been particularly common in the last few years. This year, a larger percentage of funds have actually been beating the popular indexes as compared to 1998 when the majority of funds were significantly trailing their benchmarks.

It will probably always be the case that there will be large differences between the best and the poorest performing funds in identical fund categories. But, somehow, this year things seem to be extremely discrepant. Funds in seemingly similar categories are all over the map in terms of performance.

For example, some of the best performing small cap growth funds have gone up 100% or more so far, while some of the underperformers, such as the Vanguard Small Cap Growth Index, are up only one tenth that amount. In the international category, the average European fund is now up what would otherwise be a respectable 18% until we notice that some other international funds investing heavily, although not exclusively, in Europe too are up a much more vigorous 45 to 65%. (Vanguard's Europe Index trails here, up only 10% so far.) More than usual then it appears that just picking the right category wasn't enough: To really excel, you also had to be in the right fund.

Guidelines to Consider

So given these results, does it now make sense to shift out of some of these mediocre performers within our portfolios and set our sights higher? Although I can not give you any black and white answers, here are some guidelines to consider:

HAPPY HOLIDAYS!

Home
Accesses: