Bad Investments to Get Rid of Now

With the stock market on track to lose 40% or more in 2008, you won't find many positive performers in your portfolio this year. But that doesn't mean you shouldn't give all your investments a hard look, to see if they deserve to stick around in 2009 and beyond.

In fact, it's even more important that you take a critical view of your portfolio right now. While good years may give you the luxury of letting some underperformers slide, the top priority of preserving your capital demands that you not let bad investments suck away any more of your hard-earned money than absolutely necessary.

Looking at performance
Deciding when to get rid of a particular stock depends on a number of factors. Although strong financial results always make a company more attractive, financials alone don't necessarily mean that a stock will post market-beating returns in the future. Look no further than the energy sector to see some good examples of that:

Company

Net Income, Past 12 Months

1-Year Total Return

ExxonMobil (NYSE: XOM  )

$49.1 billion

(16.3%)

Chevron (NYSE: CVX  )

$23.9 billion

(22.3%)

ConocoPhillips (NYSE: COP  )

$19.1 billion

(43.6%)

BP (NYSE: BP  )

$28.9 billion

(35.2%)

Valero Energy (NYSE: VLO  )

$2.7 billion

(69.9%)

Chesapeake Energy (NYSE: CHK  )

$1.7 billion

(60.4%)

Schlumberger (NYSE: SLB  )

$5.6 billion

(58.1%)

Source: Yahoo! Finance.

As you can see, strong profitability isn't enough to sustain stock prices. You have to follow through and continue to build on past profits. In the case of energy, slowing growth prospects and falling oil prices promise to squeeze net income going forward, strongly suggesting that current profit numbers are one-time windfalls.

When to sell a mutual fund
Similarly, when you're looking at your mutual fund portfolio, past performance is just one element in determining whether a fund's worth holding. You also have to look at a host of other factors, including the fund's management experience, investing style, and any steps the fund plans to take to improve results going forward.

For instance, the most recent issue of our Motley Fool Champion Funds newsletter includes a couple of sell recommendations for past newsletter picks. In both cases, the funds in question have had good performance records in the past, with below-average expense ratios and reasonable stock picks.

Several factors persuaded lead advisor Amanda Kish to sell:

  • Inexperienced management. Both funds had relatively new managers at the helm, both of whom didn't protect investors from the past year's downturn.
  • Underperformance compared to peers. While losses are to be expected, you shouldn't have to lose more than your tracking benchmark or other typical funds in the same category. Both of these funds lagged both benchmarks and peers badly in the last year or two.

Yet perhaps the most important reason for selling these funds is that changing market conditions ran contrary to the reason Champion Funds picked them in the first place. That's why it's so important to write down your reasoning for buying a particular stock or fund right when you buy it. That way, you can look back at your explanation, and if things have changed, then you'll know you need to reconsider your pick.

It's never easy to get rid of a stock or mutual fund, especially after you've done a lot of work researching it. Yet when markets aren't dishing out big gains year after year, you can't afford to have any of your investments drag down your overall performance. As hard as it may be to cut off badly performing investments, doing so will help you maximize your profits over the long haul.

Further Foolish insights:

If you're looking to figure out whether your investments are good or bad, check out our Motley Fool Champion Funds newsletter. You'll get no-nonsense recommendations on when to buy and sell mutual funds. A free 30-day trial opens the door to a wealth of information with no obligation.

Fool contributor Dan Caplinger has culled out some losers in his portfolio lately. He owns shares of Chesapeake Energy, which is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy makes you a winner.


Read/Post Comments (4) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2008, at 5:20 PM, driller101 wrote:

    Let me see if I have this right..to decide what investments to get rid of now, look to future performance. Great idea, except the article sorta hinted that you would tell us which bad investments to get rid of.

    Do y'all ever put out anything that isn't a promotion?

  • Report this Comment On December 31, 2008, at 10:41 AM, bcaikman wrote:

    Interesting that several months ago Fool recommended to buy CHK very heavily. Now the recommendation is to sell. I understand that we can not predict the market, but please...

    I am learning that I need to conduct my own analysis and make my own decisions and not rely on the recommendations of Motley Fool.

    and yes, every "article" that comes out is a promotion. How do you think that they are making their millions? Surely not in the stock market...

  • Report this Comment On January 07, 2009, at 4:27 PM, dozeblues wrote:

    I couldn't agree more. I've lost count of how many "products" these guys have. It feels like 3 card monty. How about coming up with one product (for one fee), laying all of your cards on the table, and seeing if your holding any aces?

  • Report this Comment On January 23, 2009, at 9:09 PM, retry77 wrote:

    I'd have to disagree with the article. The energy chart they use an example shows returns for the last 12 mos.

    Am I the only one that thinks everything tanked last year?

    I bought into Valero (VLO) mid December, and it's doing rather well.

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