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For about 5 years now, I have been investing $300-400/month in a so called "high risk" mutual fund. I started just before the crash, and have weathered it. Today its value is 102% of book.

I have essentially 3 choices:

  1. keep investing,
  2. invest elsewhere, (but leave funds where they are)
  3. pull out as deferred fees expire (and invest elsewhere).

What I don't know is how to frame my analysis of the current situation. Obviously a high risk fund will go through some bad spells. How can I determine if my fund is a dud or a winner?

6

The most basic way of determining whether a specific fund is a dud or not is to compare it to a correponding ETF or index. For example, if you are invested in an emerging market fund, compare your results to the iShares MSCI Emerging Markets Index Fund (EEM). If you are not getting the same return over time, or are incurring significantly more risk, I would question the value of staying in that particular fund.

  • This is still a hindsight answer, but it at least provides a methodology for rating the fund. – Chris Cudmore Mar 29 '11 at 14:18
  • 1
    You are looking for an answer that requires foresight? If we could predict where a fund would be going we'd be cruising on our yachts right now instead of answering questions online. =) – JohnFx Mar 29 '11 at 15:27
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Here is a good rule that I use when deciding to stick with an investment or not.

If you had the cash value of the fund instead of the actual mutual fund today, would you use it to buy that fund?

If you can't honestly say you would, then it is time to bail, because that is effectively what you are doing by doing nothing.

  • Good answer, but for the wrong question. I shouldn't judge a fund out of hindsight. This is particularly problematic with a high risk fund and the recent economic troubles. It may very well be that this particular fund is poised to skyrocket, and pulling out would be a bad idea. – Chris Cudmore Mar 29 '11 at 14:16
  • That could be true for any fund you are considering purchasing. My point is to just treat it the same way you would if you didn't already own it when deciding whether you need to be invested in it. – JohnFx Mar 29 '11 at 15:26
  • fair enough.... – Chris Cudmore Mar 29 '11 at 15:27
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Investments aren't pets -- you cannot associate emotion with them.

It's time to start dumping an investment when other investments have better prospects. And unless you're talking about a trivial investment, you should be selling lots the fund over a period of time if you decide to get out.

Also, in the future avoid funds that carry sales loads or other fees. There is no reason to pay a premium for a mutual fund.

EDIT: I (ab)used the term "dollar cost averaging" previously in way that could be confused.

  • Never thought about dollar cost averaging OUT of a fund. That is a good idea. – JohnFx Mar 25 '11 at 14:51
  • I'm not so sure about that DCA out of a fund. It means I sell more shares when the fund is low, and fewer when it is high. I'd rather sell X shares a month. I'll post it as a new question. – Chris Cudmore Mar 25 '11 at 17:49

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