You're free to switch investment choices as often as you want, but should you make a change? As we approach the end of the year, I often meet with clients to discuss how their investments are working and whether they are the best choices going forward for the next year.
Answering questions about making a switch isn't always easy. While it is you who will make the final choice, I thought that it might be a good idea to go over different strategies and reasons you might consider switching investments.
Changes in yourpersonal life
One of the first things I ask clients is if they experienced a significant change in their lives, such as marriage, a new child, divorce or death of a loved one. If so, they may want to alter their asset mix to reflect the changes.
Current goals and risk tolerance may be different. As you near retirement, your investment strategy may become more conservative as well and you may consider less volatile assets.
Changes in the economy
If the economy experiences a significant change, such as inflation or recession, you should make sure the portfolio you are invested in has the potential to perform well in the current economic environment.
For example, if your money is in a small-cap growth fund during economic expansion, you may want to consider making a switch if the economy slows down. However, you probably won't want to make any major changes if you think the economy is just experiencing a temporary blip. You want to make changes that reflect long-term changes in the economy.
Changes in the portfolio
If you notice significant changes in your portfolio, you may want to make a switch. For example, if the performance of a mutual fund has taken a long-term turn for the worse, you need to evaluate whether you should hold that fund.
If a fund has a new manager, watch the fund to see if the performance changes. If that fund no longer matches your personal investment strategy, it may be time to change it. I use filters to compare funds against each other to find the best overall performers. After all, why own the worst funds available when you can own the best. (Mutual funds are sold by prospectus only.)
Reasons not to switch
Now let's talk about reasons not to switch.
As a long-term investor, you need to be cautious about switching investments. Changing at the wrong time could mean that you miss out on potential gains. You also need to be aware of tax consequences when making a switch. If your decision to change is based on life or economic changes, make sure that they are long term as well.
Even if you have concerns about one of your investments, there still might be a good reason to hold it a while longer. If, for example, the portfolio has an investment philosophy that matches yours and is just experiencing a normal cycle (example, bond funds in a rising interest rate environment) you may want to hold on a while longer. Ask yourself why you bought that investment in the first place.
So what if you do make a switch? Before investing in a new fund, do some research. Don't base your decision only on past performance. A portfolio that was hot last year may fizzle the next. In addition to looking at the portfolio's long term performance, consider the outlook for economic growth, inflation, interest rates, and market conditions.
I am convinced that the more informed you are as an investor, the more confident you will be in your choices. The dizzying array of investment choices these days means that you should be able to match your own investment philosophy to product choices, but don't get too complacent, things change and so should your investments. I sure hope that the miniature donkeys will work long term for me. I think I will call it rotation into commodities.
If you would like more information on switching I can be contacted at 841-4277. I hope everyone has a happy Nevada Day.
n Carol Perry, a Northern Nevada resident since 1983, represents the firm of Wachovia Securities in Carson City.