It’s a Good Month to Re-Evaluate Investments

A new year, a new President and perhaps some new legs for the economy.

With so many changes, you might want to take a fresh look at your mutual fund portfolio. As popular as buy-and-hold investing has become, it’s a good idea to review your fund holdings periodically with an eye on re-balancing or fine-tuning your mix.

January is a good time to do so, given that the previous year’s performance numbers for individual mutual funds, fund categories and market indexes are still fresh.

“The new year is an appropriate time to re-evaluate a portfolio, especially this year with a new Administration and tax regulations,” says Leilani Hall, executive vice president of the Enterprise Group, an Atlanta fund family that specializes in asset allocation.

Your first step should be determining whether you have the main investment bases covered. There’s no ideal number or mix of funds, but a rule of thumb is to own somewhere between three and perhaps seven or eight funds, for diversification’s sake. A typical core portfolio would draw primarily from the following fund groups: money market, high-quality bond, tax-exempt (municipal) bond, blue chip stock, small-company stock and international equity.

Assuming you have a fairly diverse portfolio to begin with, you can probably justify some fine-tuning for many reasons, most of which can be lumped into one of four categories:

* Your personal circumstances change. Marriage, divorce, retirement or a significant change in income are among the obvious reasons you might want to alter your fund mix--shifting it either in favor of higher risk and long-term return (stocks) or greater current income and stability (bonds).

Also, consider whether your investment philosophy, tolerance for risk, liquidity needs or anticipated holding period have changed since you first assembled your portfolio.

* The investment climate changes. Chances are that you bought a fund in part because you saw it benefiting from some broad economic or financial trends. If you believe that those trends are changing, the fund may no longer be appropriate for you.

“The primary catalysts are interest rates and inflation,” notes Mark D. Tarver, a broker specializing in mutual funds at A.G. Edwards & Sons in Irvine. If you assume the trend in rates and inflation is still down, or flat, “I wouldn’t see any reason to make a major change in the portfolio.”

But if you believe that interest rates are going up, bond funds in particular could be hurt.

*

On the flip side, consider whether your mix of funds includes those market sectors that appear to be in long-term up-trends. Indeed, a particular style of investor or market sector might predominate for several years at a stretch.

Small stocks, for instance, have been in vogue since the fall of 1990, after having trailed the blue chips over the previous seven years.

* Your fund changes. Portfolio managers die, retire, get fired or decide to venture out on their own. If your fund gets new leadership, that might be justification to sell--especially if you were happy with prior management.

Heavier fund-management costs might be another reason to sell. A red flag: A fund’s operating expenses keep rising as a percentage of assets.

* Your fund lags the competition. If there is a problem with poor management, excessive fees or the like, chances are it will eventually be reflected in your fund’s performance.

When analyzing a fund’s investment return, it’s important to compare it to appropriate market benchmarks and other funds of the same type. That’s the easy part.

*

The hard part is deciding how long to stick with a lagging fund. Your decision should be based in part on the factors mentioned above--whether the fund is suffering from a change in the investment climate, for example, or from a change in management.

How often should you make a sweeping review of your fund portfolio and its performance? Hall, whose company provides asset-allocation questionnaires to shareholders to help them make decisions, figures a detailed evaluation might be necessary just once every three to five years.

Tarver, however, recommends a review every six months, with an eye toward switching out of unexpectedly volatile funds at that time. “The big concern should be downside exposure,” he says. You may not want to stay with a fund that has dropped more than you had expected was possible in a short time.

Another reason to review your portfolio periodically is because your mix of assets can change simply because of market moves.

Suppose you desire a 60-30-10 split among stocks, bonds and money markets. Yet a recent stock rally has pushed the ratio to 75-20-5. In this case, you might want to sell some of your stock fund holdings and switch the proceeds into bonds and cash.

Who Owns What If you’re a typical mutual fund investor, you might want to make a New Year’s resolution to diversify your portfolio. Although fund ownership has surged in recent years, 52% of shareholder households have a stake in just one of the three main fund categories: equity, bond and money market. Only 14% have a position in all three groups. Here are some key ownership statistics: Median household assets: $50,000 Median household assets in funds: $18,200 Median number of funds owned: 2 Median number of fund groups used: 2 Percentage of households owning Equity funds only: 29% Bond funds only: 9% Money market funds only: 14% Any two groups: 34% All three: 14% Source: Investment Company Institute