BOSTON – Fiscal fitness is knocking weight loss off the top of many New Year’s resolution lists, thanks to 2008’s market drubbing. That often means casting off last year’s worst-performing mutual funds for more promising alternatives.
Though a recovery may be a ways off, there’s plenty of opportunity now. Many funds with solid long-term records closed to new investors a few years ago but are reopening. Managers hope to raise cash and snap up potential bargain stocks.
Switching to a new fund could turn out to be a wise move, but think twice – especially after a steep market plunge. Experts advise resisting the urge to sell a fund simply because it adopts an aggressive strategy that ended up making it an unusually big loser. Many questions an investor should consider before pulling out of a fund are worth asking in good times or bad. But there are a few timely considerations given the market’s recent slide:
•Consider if yesterday’s losers will become tomorrow’s winners. While declines in some of the hardest-hit sectors represented corrections to stocks that had been priced too high, business fundamentals sometimes get ignored during volatile periods. That means some battered stocks could be ready to rebound – as could funds that employed risky strategies that do best in bull markets.
•Think long term. . Because 2008 was so unusual, it’s especially important to consider more than just last year’s performance. Evaluate three or five years, or even longer. “Even the best funds are going to have not-so-great years,” said Eric Tyson, author of “Mutual Funds for Dummies.” “You shouldn’t necessarily give up on a fund just because it may have underperformed for one year.”
•Use the right benchmarks. While virtually no market sector escaped 2008’s plunge, some fared better than others. Therefore it’s best to consider how a fund stacked up against peers with similar investment profiles, rather than the broader market.
•Watch for rising fees. Money managers cover expenses through fees that rise and fall based on a fund’s asset level, and funds with more money are generally more efficient. With assets values taking a big hit, many funds are hitting “break-even points” that will trigger fee increases to cover expenses this year. Take a close look at funds’ semiannual reports for fee changes, or check fund information online.
•Beware the costs of fund-jumping. If you got into a fund recently but want to get out, be aware that some funds charge early redemption fees of 1 percent to 2 percent if you sell within the first six months to a year. Read fund rules in the prospectus. And if you’re going to switch, consider a fund within the same fund company. Many providers don’t assess fees if you switch to another one of their funds. And if a commission-based adviser is urging you to shift to a new fund, consider whether the move is worth any fee or “load” that you may pay – they can often amount to more than 5 percent of the amount invested.
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