For many investors, a solid mutual fund performs in line with its benchmark; for others, it’s a fund that zooms ahead of the market. But these aren’t necessarily the best ways to judge a fund.
Mutual funds, like the stocks and bonds they hold, are subject to market cycles. Sometimes they perform well and other times they perform poorly. Some investors try to “time the market,” by moving in and out of a fund, but this can be costly. The market moves quickly; you could easily end up selling low and buying high, triggering a higher tax bill.
Portfolio managers also haven’t the flexibility to adjust their portfolios to meet changing market cycles; a bond-fund portfolio manager is usually required by the fund’s prospectus to invest in bonds even when the bond market is down.
A diversified portfolio based on your goals, risk tolerance, and time horizon can minimize market concerns. It won’t eliminate risk, but a diversified portfolio can help provide you a cushion in a downturn.
When some funds perform poorly, others may be performing well. This balances your overall return.
Just as goals, risk tolerance, and time horizon help you create your portfolio, these factors should also guide you in deciding when to change it.
In creating your portfolio, you were required to consider how much volatility you can tolerate. If your portfolio begins to exceed your volatility tolerance, re-examine it. You may want to consider dropping losers.
However, this can be a difficult decision; ask your advisor for help.
Yann Kostic is a Financial Advisor (RIA) and Money Manager with Atlantis Wealth Management specializing in retirees (or soon to be), self-reliant women and Expats in Mexico. Yann works with TD Ameritrade Institutional (the custodian of client’s assets). He splits his time between Central Florida, the Central Pacific Coast of Mexico and Lake Chapala. Comments, questions or to request his Newsletter “News You Can Use”, contact him at Yannk@AtlantisWealth.com, or by phone in Mexico (376) 106-1613 or in the US (321) 574-1529.