WHAT TO DO WITH LAST YEAR'S HOT FUNDS
Deciding whether or not to sell shares of last year's hottest stock funds can cause big-time headaches. One side of your brain is saying, "Keep it. It's going to fly higher", while no doubt another voice encouraging you to take some profits.
Linda Babcock can relate. Although she's new to stock fund investing she has been an individual stock investor for years. And, while she has learned that if a stock's price increases three times, five times, eight times or more within a year, she should thank her lucky stars, sell it and invest again, what's puzzling her these days is if that same strategy applies to equity funds that go up say 100, 150, or 200 percent or more within one year.
"I'd like to know what to do," asks this Dallas homemaker." Should I sell the shares and buy into another fund or what?"
As simple as that question sounds, there's no one right answer for everyone.
"I don't think anyone ought to change their strategies other than to make sure that they are rebalancing their portfolio based on their prior asset allocation decisions, " says Maria Crawford Scott, editor of the AAII Journal published by the American Association of Individual Investors.
If one portion of someone's entire portfolio increases tremendously over a 12-month time period, Scott suggests moving money to rebalance it but to consider the possible tax consequences first. As for taking profits, she's no big fan of it.
"Typically there's no reason to take a profit," she says." The approach in investing should be to determine an asset allocation that you're comfortable with and make your (investment) decisions on that basis."
She thinks that taking profits is like trying to time the market, that is, guessing which sectors are going to do well at various times. "That's very difficult to do and is often what people are doing when they take profits."
But not everyone sees it that way.
Edward Rosenbaum, director of research at Lipper, Inc. says that there are no hard and fast rules for selling fund shares. His suggestion for investors who've realized tremendous gains from their equity funds in 1999 has three parts to it: First, be happy with the great performance; then, try and figure out why the performance was so strong; and finally, see if you believe that that great performance is likely to happen again this year.
For those with equity funds up say 100, 150, 200- plus percent or more last year, Rosenbaum said that "the odds are" it happened because you were invested in some form of tech or Japan fund.
If that's your situation, when you ask yourself if you think that the performance of the fund was due to something that could be as true this year as it was last. Rosenbaum figures you'll come up with different answers depending upon whether you're holding sales of Japan funds or tech funds.
A couple of reasons Japan funds had such strong showings in 1999 were due to an economic recovery and fact that the retail investor has returned to the equity markets. Reasons for the US technology rally include the boom in Internet stocks and IPOs.
Whether or not to sell shares of a one-year hot-diggity dog performing fund boils down to how--and what--- you think. Believe that the type of fund you own is going to have another stellar year and you'll do one thing. Think that fund performance tends to return to the mean, and you'll probably do another. Have asset allocation as the base for your investment decisions and you'll probably do something else.
"The right choice has to do with not chasing the best return available last year but chasing the best return which is consistent with your own risk profile," says Rosenbaum. "In other words, if you can't sleep at night because you think the fund might lose half of its value, and it's probably not an appropriate place for you to be invested."
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