Guide to Mutual Funds: 5-Star
Strategies for Success
According to a recent survey,more than 80% of physicianswere unhappy with their investmentportfolio's performancethis past year. If you're one of thesedisgruntled physicians, consider thefollowing advice from (Wiley; 2003):
1. Don't chase performance.The funds that have performed wellduring the bear market—bond fundsand small cap stock funds—aren't asure thing to lead the way in thefuture. Instead, your best strategy isto maintain a diversified portfolio ofstock funds, bond funds, and moneymarket funds, and mix it up amonginvestment styles.
2. Check up on your portfolio'sasset allocation. Even if youhaven't been actively repositioningyour portfolio, the bear market hasreduced most portfolios' stock positions.Embarking on an annual rebalancingprogram—reducing yourstake in strong-performing assetclasses and increasing your positionsin what hasn't done as well—willimprove your portfolio's long-termrisk/reward profile.
3. Know who's running theshow. The bear market has affectedfund companies, resulting in mergersand personnel changes. Investigatethe quality of your manager's credentials,length of tenure on the fund,and the quality of the organization.
4. Find a great core fund. Thecenterpiece of any portfolio shouldbe a core large company stock fundthat will perform reasonably wellduring bull or bear markets.
5. Know what your funds own.These days, it's possible that the fundyou count on to be conservative isbuying the beaten-down technologystocks, while your aggressive fundhas retreated into a defensive stance.Use tools like the Morningstar StyleBox, which gives you a snapshot of afund's investing style, for help.
6. Don't be too quick to dumpa "loser." Recent market losses hurt,but before you dump a fund, see howit has stacked up alongside otherfunds with similar investment styles.It's possible that the dog in your portfolioisn't as bad as you think.
7. Understand the risks. Inaddition to checking how risky afund has been in the past, be on thelookout for future risks—such as bigindividual stock or sector bets.
8. Plan for taxes. Because of therecent bear market, many funds willnot be paying out any capital gains foryears. But you should still keep taxconsiderations in mind when planningyour portfolio. Put fast-tradingfunds, which are often tax-inefficient,in your tax-deferred accounts.
9. Pinch pennies. With shrinkingasset bases to deal with, it's likelymany funds will increase their expenses.Opt for those with low costs.
10. Clean house. Most investorsdon't need narrowly focused or ultra-aggressivegrowth funds—they arevolatile and often redundant withinvestors' other funds. Consider unloadingthem—you can even use yourtax losses to offset capital gains or upto $3000 in ordinary income.
This column was reproduced with permission
from Morningstar's Guide to Mutual Funds: 5-Star Strategies for Success, by Christine Benz,
Peter Di Teresa, and Russel Kinnel. For more
information, contact Morningstar (312-696-6000; www.morningstar.com).