When Your Mutual Fund Displeases You

If your fund hasn't been doing well and you're thinking of switching to something else, first make sure that it's doing unusually poorly. The fact that your mutual fund earned 25% last year and this year only earned 15% is not a good reason to switch, since it is still outperforming the market in general. But you'll also want to look at it in comparison to other funds: is everybody doing great because it's a great year, or are other funds bringing in less than yours? If it's a sector fund, meaning that it's based on a particular industry like banking or transportation, how are the other funds of that sector doing? Maybe

it's a rotten year for that sector, but since sectors have rarely failed since the demise of the horse and carriage (once a mainstay of transportation investing), chances are that next year will see an improvement.

This is a good place to mention sector funds. If you're interested in diversification, you shouldn't buy a sector fund because it's only based on one thing, and that thing could go south with all your money. (On the other hand, I know someone who chose a pharmaceutical fund because it was the only one in the brokerage that didn't carry oil stock, and the thing has brought in 13-16% returns year after year. You can pretty well count on things like sickness and death and the need for loads of drugs and plastic tubing and all the things that go into and come out of hospitals.)

If you're thinking of dumping your current fund, you can also look at your mutual fund in relation to the stock market index that represents it. If you have a large-cap fund, look at the percentage returns on the Dow or the S&P 500 to see if your fund is much out of line. It may be (and often is) representative of whatever's going on in the markets in general, in which case, you may as well stay put because you'll do as poorly anywhere. Besides, where's the sense is ditching your mutual fund when its shares are low? Buy high and sell low is the exact opposite of what smart investors do, even though they may occasionally wake screaming in the night while they wait for the upturn.

If you do buy a truly bad fund, it's probably a new fund with a manager who bought his MBA from a matchbook, or it's in a volatile or narrow sector, and you probably got talked into it by someone who had "inside information" or is related to you by marriage or who is making big commissions by selling this lemon to newbies who don't know any better. If this should befall you, and you know it's a loser because everyone says so, you should definitely sell it and then pick the safest, stodgiest fund you can find. Then, forgive yourself.

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1. Customize your budget with your current needs, wants and future goals in mind.

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