As a new year begins, many mutual fund investors set aside time to give their portfolios an annual checkup.
The idea isn't to sell old funds and buy new ones just for the sake of change. A wholesale shake-up could prove expensive in taxes and transaction costs, as well as counterproductive.
After all, if you have lost your enthusiasm for the funds you owned last year, what makes you think you possess the ability to pick a new batch that you will still like a year from now?
But even if you don't expect to make many changes, a portfolio checkup can serve several useful purposes.
What follows is an outline of the way an annual review might proceed:
1. If you don't already have a well-organized inventory of your fund portfolio, make a list of the funds you own, grouped by asset class or investment style.
2. Beside the name of each fund, list the Dec. 31 dollar value of your shares in each. Once you have a tally for all your funds, add up the total for each category and the portfolio as a whole. Then calculate the percentage of your total holdings that each fund and category represents.
3. Compare these percentages against your plan for allocating your assets among the categories.
4. If the percentages have gotten out of line _ or if you want to change the formula _ rebalance by moving some money out of one type of fund into another.
Be mindful that any sales you make may result in a tax obligation.
5. After you finish your asset-allocation review, check the performance record of each fund you own, not only for the past year, but for the past three, five, even 10 or 15 years.
Then ask yourself: Is the manager getting the kind of results I expected, considering the fund's style of operation and the prevailing market climate?
Context is important here. For instance, a small-cap fund manager can probably be forgiven if he or she didn't make you any money in 1998, considering that hardly anybody had much success with small stocks during the year.
6. After this fund-by-fund review has been completed, you may have marked some funds on your list that have been unqualified disappointments, measured in both absolute and relative terms against their competition.
Investigate why these funds haven't measured up. Has there been a change in managers, or does the group at the helm simply seem to have lost its bearings? Were mistakes made that now seem to have been corrected? Or does the manager's style simply lend itself to occasional cold spells that have always been worth riding out in the past?
7. After this research, maybe some funds on your disappointments list leave you convinced that it is time for a change.
In that case, you will want to check out possible replacements that fit the mission you want to pursue. In changing an individual name or two in your portfolio, you never want to lose track of your goals and your overall plan for pursuing them.