Hey, Why Is My Mutual Fund Lagging That One?Submitted by O'Grady Financial Group on January 22nd, 2019
Happy New Year...still. Yeah, I’ll probably keep saying that until February. Or until I get the letter from the home owner’s association that says I’ll be fined if I don’t take down the Christmas lights.
Yep…January. Everyone likes a fresh start. It’s the time of year when folks dig into their account statements…the brokerage, the IRAs, the 401k year enders.
You might glance at how much you have, where the account started off the year, and the rate of return. Hey, it’s no secret…the overall market, the S&P 500 was down in 2018…so there’s a pretty good chance, so was your account.
Some folks will drill down into the specific holdings…the mutual funds that make up the portfolio. Nothing wrong with that. I’m always curious how they’re doing.
But here’s a tempting trap I don’t want you to fall into. Looking at the best performing fund and wanting to put everything in that one…or conversely, wanting to move everything out of the worst performing fund. That is…selling the funds that are already down to buy the ones that are already up. A perfect Reverse Grandpa.
In a diversified portfolio, something is always going to be underperforming. That’s how you know it’s diversified. It’s by design. We don’t know ahead of time what category, sector, or type of fund will be the best performer. That’s why we spread it around…diversify the volatility.
Let’s try this…let’s say you’re preparing a steak dinner. You’ve got a dinner salad, some French onion soup, a baked potato with bacon and sour cream, and a beautiful medium rare filet mignon.
You take a bite of the salad, but it tastes like steak. The French onion soup tastes like meat, the baked potato…meat again. As does the filet. What’s the point of the other food if it all tastes the same?
See what I did there. OK…that was a stretch. And now I’m hungry. The point is, if all your funds are performing the same…you may not be as diversified as you thought. And if you have some funds that seem to be underperforming the others…that may just be evidence you’ve got a diversified portfolio.
Need some help deciphering your statement or portfolio. Let’s connect. It’s easy to schedule a call right from the website.
Oh…by the way…Happy New Year!
Investing in mutual funds involves risk, including possible loss of principal.
Investors should consider the investment objectives, risk, charges and expenses of the mutual fund carefully before investing. The prospectuses and, if available, the summary prospectuses contain this and other important information about the mutual fund. You can obtain prospectuses and summary prospectuses from your financial representative. Read carefully before investing.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.