As the last 10 days, and indeed the last 10 years of the stock market have taught us, the financial you-know-what hits the fan on a pretty regular basis.
Recently, many pundits have urged us not to sell our holdings (usually mutual funds) in a panic because good investments will survive the carnage.
This is essentially the buy and hold philosophy, which has been a staple bit of investment advice for decades.
The trouble is it works just fine for mutual fund companies and commission based advisors because they get paid through fees as long as you hang on to your funds. But it doesn’t work for most investors.
The reason is that during market meltdowns bad investments are hauled down further than good ones. They also take longer to recover and some never do.
How do you know you’ve got a stinker of a fund? Easy. Look it up. One of the best sites is morningstar.ca. Type in the name of your fund then click View Quicktake Reports.
Look down the quote page to the performance chart to see how well the fund has done over time compared to its category.
The chart will show a graph with three lines indicating how your fund fares relative to its category and also relative to the broader market.
For example, a broad-based Canadian equity fund would be compared against its category and also against the S&P/TSX Composite Index.
You can also ask your advisor to pull up the same information for you on each of the funds you hold.
Note that most mutual funds will not perform as well as the index. Your goal is to have funds that out-perform their category.
If any of your funds are sub-par you may want to sell and buy better ones in the same category (check into deferred sales charges first).
You will likely still get sucked down by stock market meltdowns when they happen but a good fund will ride it out much better than its lower quality cousin.