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Thursday, January 17, 2008

Evaluating Mutual Fund Performance in a Down Market

In this down market, don’t make the mistake of dumping a mutual fund just because it is down. Unless your stock fund made a big bet against sub-prime lending, your stock fund probably is down significantly over the past six months. In this type of environment, two common mistakes are:
1. My fund went down. It must be bad. I’ll sell the fund and buy something that went up.
2. My fund went down. It must be bad. I’ll sell the fund and buy another fund in the same sector.

In a down market, look at how a fund did relative to its peer group. You want the best, risk adjusted, fund in each asset class. If your fund was in the top 10-25% of its asset class in a down market, transaction costs make moving funds a questionable decision.

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