A: (Paul) Congratulations on your
retirement and I wish you many years of successful investing. All of the funds
you mentioned have as their investment objective a higher concentration of
growth rather than Income. None of the above mentioned will get you the largest
income stream on a consistent basis.
To focus entirely on safety and Income, you should consider a number of fixed
income instruments including short and mid-term treasuries, municipal and
corporate bonds and bond funds. Security diversification with short to mid-term
maturities should offer some protection against future interest rate increases.
Depending on your Income needs and your life expectancy, you should not
necessarily exclude some exposure to equities. You will need some portfolio
growth to maintain you future purchasing power to offset taxes and inflation.
When should you ditch a fund?
from Rick
Q: I have one fund that has turned into a two-star (Morningstar)
rating and has consistently underperformed same class funds. I hate to get out
while the market seems to be low. When do you get out of a fund that has
underperformed?
A: (Paul) Your answer could depend
on why you chose that fund initially. Did it meet your long term objective and
were you comfortable with its risk profile? This analysis is important so you
won't duplicate this mistake in the future.
Reasons to liquidate or exchange shares are as follows:
* Has the fund manager left the Company?
* Has the Funds objective changed and has this fund underperformed its peers?
By monitoring it regularly, you won't watch it go from a 5 star to a 2 star.
If there are better values don't hesitate to liquidate, take the loss and move
to a more attractive fund. If you wouldn't buy these shares at this price, then
that's the time to change investments.
How much latitude does a fund manager have?
from Ray
Q: How much latitude does a fund manager have in moving investments
from stocks that are losing value to stocks that are growing?
For example, I retired at the end of 1999 when my 401(k) grew to more
than $300K, the level I thought I needed to retire. On March 10, my mutual
funds had grown to more that $410K. Due to systematic withdrawals and a
declining market, my 401k dropped to $222K in last December.
I have stopped my systematic withdrawals, but it seems the fund managers are
not doing anything to stop the hemorrhaging of their funds!
A: (Rick) Mutual fund managers must
follow the investment strategy outlined in their funds Prospectus. It is evident
from the rapid gains and losses in your account since 1999 that you where
invested in very aggressive growth funds. Investors in aggressive growth funds
should generally expect the manager to remain fully invested in stocks
even during adverse market conditions.
Pardon me if I am blunt with my next point, but when you retired at the end
of 1999, it would have been prudent to change your investment strategy to a more
conservative portfolio. There was no longer any need for you to be invested in
aggressive growth funds since you had already reach your goal of $300,000. While
you are upset that the "fund managers are not doing anything to stop the
hemorrhaging", it seems that you did not do anything to protect your nest
egg either.
Important Disclaimer
Investing in equities involves a serious
principal risk, and no assurance can be given that the techniques described here
will be successful. Returns vary and you may have a gain or loss when you sell
your shares. Past performance is no guarantee of future results. Index returns
shown are historical and include the change in share price, reinvestment of
dividends, and capital gains. Indexes are unmanaged and do not reflect the
impact of transaction costs. Transaction costs would have reduced the total
returns.
International investments, especially those in
emerging markets, entail greater risks (as well as greater potential rewards)
than U.S. investing. These risks include political and economic uncertainties of
foreign countries, as well as the risk of currency fluctuations. These risks are
magnified in countries with emerging markets, since these countries may have
relatively unstable governments and less-established markets and economies.
Lastly, the questions and responses set forth
here are for general informational purposes only and are not intended to
substitute for performing your own independent research or contacting your
financial or legal professional before making any investment decisions. We make
no guarantees as to the performance of any investment strategy you choose and
are not responsible for any losses you might incur.
Paul
Pignone
Rick
Ferri