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Assessing Your Funds' Performance

Here's how to evaluate your portfolio, taking into account the current market and your investment goals.


In a market such as the current one, the key question many investors ask is, "Am I in the right funds?"

The intelligent answer to that question can only follow from a series of other questions that will help you put your funds' performance numbers in the context of the market and your investment goals.

Here's how to go about an evaluation:

* Collect the data on your fund's returns. The tables in the back of this special section (pages U16-U18) provide a performance snapshot of thousands of stock and bond mutual funds. Your fund's data is, of course, also available on your fund company's Web site and fund-tracker Morningstar Inc.'s site at

The Times' quarterly tables provide total-return figures for the third quarter, year to date and last three years, all through Sept. 29.

* Check your fund's category or investment objective. Each fund listed in The Times' tables fits a particular "objective category" as determined by Morningstar, such as "large-value" stocks or "small-growth" stocks. Each category has a two-letter code, such as LV for large value.

* Check your fund's performance against its category average. Many people compare their fund's returns against a broad market index such as the blue-chip Standard & Poor's 500. But if your fund doesn't own blue-chip stocks, that isn't a fair comparison.

If you own a Japanese stock fund that fell 5% in the quarter, for example, that's far worse than the S&P 500's 1% loss. But the average Japanese stock fund fell 10.2% in the quarter. So a 5% loss, by comparison, is an above-average return in that sector.

You'll find a summary of average fund returns by objective category on page U10. Search for the two-letter code for your fund in the second column of that chart.

* Look first at short-term performance results. You'd probably do this automatically. A fund's quarterly and year-to-date returns, versus its category objective, show you how it has performed in the short term. These numbers will quickly tell you if your fund is performing better, or worse, than the average fund in its group this year.

* Before you react to short-term performance numbers, look at your fund's three-year average annualized return. The three-year record, which is included in The Times' tables (for funds that have existed for at least three years), helps round out the fund's performance picture. A bad quarter, or good quarter, should be viewed in the context of that three-year annualized return number.

* What if your fund is lagging behind its peers in the short term? If your fund's returns in the third quarter and/or year to date are significantly below its category average, that may not be grounds for dumping the fund.

Any fund, after all, can have a bad few months. Start your analysis by looking at the fund's asset allocation and major stock holdings. Morningstar's Web site provides that information, but it is often a few months old (or even older). The fund company's own site may have more up-to-date data.

Has your manager been in stock sectors that are suddenly suffering? Could a few of the fund's holdings account for a big chunk of its below-average return?

Online fund write-ups by Morningstar and its rivals such as the Maxfunds Web site ( may help you answer those questions.

The important thing is, don't overreact to short-term performance numbers.

* What if your fund is lagging its peers for the three-year period? It's one thing for a particular market sector to be out of fashion. But it's another thing for an individual fund to consistently lag its category average.

If your fund's return is below the three-year category average, you'll want to review the fund much more closely. What is management's explanation for the results? Has the fund, in fact, lagged its peers for each of the last three years, or has a particularly bad spell in one year dragged the overall return figure lower?

A fund that can't at least produce average returns for its sector over three years is a candidate to be replaced by a better fund. The Morningstar tables on pages U12-U15 can be a good starting point in the search for a better fund.

* Even if the fund has struggled, are there reasons to stick with it? You might be unhappy with a fund, but if you own it in a 401(k) retirement account, and it's the only fund of its type offered in the account, you'll have to ask yourself how much you want to be in that particular investment category.

The alternative, of course, is to invest in that category outside the 401(k).

Another alternative: Ask your company's benefits coordinator to offer more, and better, choices.

* How does the fund fit within your overall portfolio? If you decide to make a change, you should do it in the context of your total portfolio. For example, if most of your funds are highly volatile and you feel like you need to check your blood pressure every time you look in the financial pages, you might want to replace your worst fund with something more boring but also more stable.

If your life has changed, that should be a factor. If you have a kid going off to college soon and you may need to help her out with cash, this could be a great time to think about selling out of laggard funds.

Or if you have a rocket ship of a fund that has grown to dominate your portfolio, you should think about whether it makes sense to unload some shares and reinvest to rebalance your investment mix.

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