4 Year-End Tips to Review Your Fund Performance

Know your risk profile and asset allocation to assess funds.

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Hal Bundrick
Hal Bundrick

It has been said that the way to make money when investing is to “buy low” and “sell high.” But how do we actually do that? Take out your last fund performance statement and let’s break down an effective way to fine-tune your mutual fund performance and ready your investments for the new year.

1. Today’s losers are tomorrow’s winners. This may seem counterintuitive, but consider buying into your losers. When reviewing your mutual fund performance for the past year, if you see a couple of mutual funds that appear to be poor performers, they may be strong contenders for additional purchases when you rebalance.

When it comes to mutual fund performance, today’s losers are quite likely tomorrow’s winners. S&P Dow Jones Indices issues a “Persistence Scorecard” twice a year, tracking the consistency of top-performing mutual funds from year to year. It has found that very few funds can stay at the top over a long period of time. Of the 692 funds that were in the top 25 percent in performance as of September 2011, only 7.2 percent managed to stay in the top 25 percent as of the end of September 2013.

2. You can automatically buy low and sell high.  Automatically buying low and selling high is simply a matter of resetting your investments back to their initial targets, at least once per year. That assumes you had an initial strategy that was based on your goals and fears. Your goal could be saving for retirement. That requires a different investing approach than saving for your daughter’s or son’s college education.

And your level of fear plays a major role, too. How would you react if your mutual funds dropped 30 percent in value over just six months? You should know your appetite for risk, which financial advisors call a “risk profile.”

If you started with a sound investment strategy, you want to keep that plan on track. If your international fund started out as 10 percent of your total investment pool but is now at 20 percent, you want to consider selling off that extra 10 percent and putting it into the funds that are now below their initial target. By doing that, you’re forcing yourself to buy low and sell high.

3. Consider the impact of fees. Most likely, your statement includes a couple of charts. One may be a pie chart showing your investment mix, or allocation. That information is useful in helping you rebalance your portfolio.

Another chart may show performance over a period of time compared to an index, like the Standard & Poor’s 500 index, or even better, to a custom benchmark that is relevant to your portfolio’s strategy. For example, if your portfolio is made up of 70 percent stocks and 30 percent bonds, your investment performance would be compared to a 70/30 composite index.

We are also looking for a substantial underperformance relative to the benchmarks. Of course, we hope to see outperformance where we’re killing the indices, but if we’re just close, it’s not a problem. However, if your portfolio is really lagging, it could be due to fees. That’s when you want to talk to your broker, financial advisor, human resources department, retirement plan sponsor or whoever else is offering these investment choices to you. High fees are the single biggest drag on performance, and if that’s the case with your portfolio, you want to fix it as soon as you can.

4. It’s a matter of category. A final consideration should be category. Each mutual fund in your portfolio is built for a particular purpose. The fund could exist to invest in big, American companies or to invest in the industries shaping growing economies overseas. These objectives are referred to as a mutual fund’s investment style. Financial advisors will use terms like "large-cap growth" or “emerging market” mutual funds to describe those funds.

You want to make sure that each fund you own is pulling its own weight by doing its own job, not duplicating what another fund is targeting. Mutual fund profiles can show you a fund’s category, as well as what sectors the fund is investing in, its top 10 holdings and more.

With each fund reviewed for its category, your portfolio passing the fee fitness test and rebalancing setting you up to buy low and sell high, you’re ready to ring in 2014.

Hal M. Bundrick is a certified financial planner and former financial advisor and senior investment specialist for Wall Street firms. He writes about retirement accounts and personal finance for NerdWallet. Follow him on Twitter: @HalMBundrick.