When you're investing, you can't win 'em all. But if you're losing even when the stock market is going up, then you need to look critically at your investments -- and you probably have some selling to do.
The stock market threw nearly everyone's returns for a loop in 2008. Under conditions that the financial markets hadn't seen in decades, few investors managed to avoid substantial losses for the year. So if your stocks didn't perform well, then you may have decided to put them on probation and hope for better days in 2009.
Now, those days have come, as the recent rally has pushed broad stock market indexes to decent gains for the year. With the losses of 2008 now in the past, your investments no longer have any excuses -- so if you're not seeing the bounce in performance that you deserve, then you have to ask yourself whether you can really afford to hold on after letting them bite you twice.
Lessons from the mutual fund world
As an example of this phenomenon, take a look at these two-time losers among mutual funds:
Fund |
2008 Return |
2009 YTD Return |
Holdings Recently Included ... |
---|---|---|---|
Markman Core Growth (MTRPX) |
(34.4%) |
(42.6%) |
Hartford Financial Services |
Bryce Capital Value (BCFVX) |
(39.5%) |
(18%) |
Hot Topic |
FundX Stock Upgrader (STOCX) |
(44.8%) |
(18.3%) |
Fifth Third Bancorp |
Source: Morningstar.
These funds have each added the insult of missing out on this year's recovery to the injuries from last year's huge drops. What factors contribute to these poor performances?
- High fees. Each of these funds has expense ratios of 1.25% or more, with Markman sporting an extremely high 3.29% in annual costs according to its prospectus. With such strong headwinds, it's tough for a fund to bounce back even when the overall stock market starts doing well.
- Tiny assets. None of these funds has more than $15 million in assets under management. Not only do low asset levels contribute to high fund costs, as fixed expenses are spread across a small shareholder base, but they also make it difficult to attract and retain high-quality experienced fund managers.
- High turnover. The Markman fund's turnover ratio clocks in at a whopping 3,452%, meaning that the fund trades the full value of its portfolio every 11 days. That goes a long way toward explaining how the fund reports holding so many stocks that have posted year-to-date gains without translating into positive results for the fund itself.
- Poor long-term performance. None of these funds has done particularly well over longer periods of time. Markman, for instance, has a 10-year track record that puts it in the bottom 3% of large-cap growth funds. Bryce hasn't been around that long, but its three-year return is worse than all but 2% of its fund peers. And FundX turns in the worst relative performance of all -- it's in the bottom 1% over the past three years.
Given how badly these funds have done in both bull and bear markets, shareholders can be confident that they'll find better results elsewhere.
Fool me twice, shame on me
The same general principle applies to individual stocks as well. It's one thing if a company performs badly when tough economic conditions make things difficult for an entire industry. But if your company is the only one to suffer losses when most of its peers are doing well, then you need to take a close look -- and you may well conclude that you're far better off getting out.
Panic-selling at the first sign of bad news is rarely the right move for long-term investors to make. But you don't want to hang on to a bad investment too long. If you look at how a stock moves during different market environments, you should get a good feeling for whether you can make back your losses in the future.
For more on turning losers into winners:
- How to capitalize on the coming recovery.
- This is what wealthy investors are doing now.
- You'll want to stay away from this stupid investment.