Time You Headed for the Big Divorce?
You’ve been abused, battered, taken advantage of, and yet you put up with the same awful treatment year after year.
Today’s topic: bad funds and the investors who love them.
OK, so it sounds like a bad talk show, except that it affects countless people. There are billions of dollars in mutual funds notable only for mediocrity and a consistent ability to under-perform peers and disappoint shareholders.
And yet many unhappy shareholders hang on, ignoring the problems or hoping that, somehow, things will change.
“People focus on picking new funds and do almost nothing with their existing investments,” says Don Phillips, president of Morningstar Inc. “Maybe they misjudged the fund or things changed, but there are a lot of people in terrible funds who must be waiting for a turnaround that simply is not coming.” There are funds aplenty that have fallen and can’t get up.
Investors avoid total losers--like the Steadman Funds, which have never appeared capable of earning much money--but stick with “fallen angels,” onetime high fliers like American Heritage that had a good year or two before hitting the skids.
Even more nefarious--and I picked it randomly from the dregs of the Lipper Analytical Services database--is a fund such as Merriman Growth & Income, which has under-performed its peers by 50% since 1991. The fund has $9 million in assets, so we can assume that shareholders are asleep at the switch or love punishment.
It is unreasonable--and dumb--to dump a fund after a bad quarter or two. Many big winners have poor years or yo-yo all around the charts. But living through a few years of consistently below-average performance is a completely different story.
There is nothing to love about a bad mutual fund. Here are some excuses people use to stay with them. If you have ever used these rationalizations, it’s time you started thinking divorce.
* “I’m too busy.” Inertia may be the biggest enemy of fund investors. Since most people dislike change and hate to own up to making mistakes, bad investments can sit in a portfolio for years.
* “It’s really not so bad.” Maybe not in a vacuum, and maybe if you don’t like money.
* “I’m waiting to get back to break-even.” This is the sister of “I’m waiting to earn back the load I paid.” In both cases, you could wait forever. Even if you recoup your losses, you might be better off getting out now and putting your money on a faster horse that speeds your recovery.
It takes guts to acknowledge investment mistakes. Most people have more guts than money, which is especially true if a fund is losing money or not growing at a reasonable pace.
* “It can’t stay bad forever.” Oh yes it can.
Some funds are consistent losers for a reason, notably poor management, high expenses or lack of discipline. Not every fund turns around; a bad manager is as likely to pick more bad stocks as he or she is to suddenly become a genius.
* “My broker hasn’t said to sell.” A big reason for having a broker or financial advisor is for emotional discipline, the handholding needed to stay put and see the long view when the current market makes you jittery. But that doesn’t mean abdicating the selection process or relying entirely on the advisor. If a broker-sold fund hasn’t produced results, ask why; if you get neither answers nor alternatives, it may be time to change both fund and advisor.
* “Everything looks fine in the fund’s reports.” Of course it does. When a fund is terminally mediocre, its manager or company president puts the shine on the sewage. If the fund’s statements about prospects and performance have never appeared in your account statements, get nervous.
* “It had a good ranking from Morningstar.” This is akin to “I found it on the cover of Money” (or any other personal finance magazine). Rankings and articles are snapshots. Yes, past performance is no guarantee of future returns, but a fund’s heyday could be over if years have passed and you haven’t gotten a sniff of its glorious past.
Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, MA 02107-2378.
