Seven steps to becoming a better fund manager

Too afraid to even look at your battered portfolio?

Don’t despair. The arrival of 2001 means you can make a fresh start, financial planners say. Becoming a better fund investor isn’t hard to do, and you’re sure to reap financial rewards.

What should mutual fund investors resolve to do in the new year? Here’s what the experts recommend:

1. Review your investments, said Ralph Scearce, a financial adviser and head of Cambridge Financial in Lexington, Ky.

"Be sure to know what you own," Scearce said. "Spend an hour or so acquainting yourself with your money. It might be hard to replace."

2. Diversify your portfolio, said Jack Piazza of Sensible Investment Strategies, a Wheaton, Ill., investment advisory firm.

"You should have a well diversified portfolio with a blending of funds depending upon your risk tolerance," Piazza said.

First off, determine whether your risk appetite is aggressive, moderate or conservative, Piazza said. This will depend on such goals as when you want to retire or when your children will head to college.

Then, pick your funds. An aggressive investor would put more money in riskier areas like technology and international stocks, Piazza explained. A conservative investor would stick more to safer bond funds.

But all investors should own some of each, Piazza said. And also hold a cross-section of large, medium and small companies. Domestic and international companies. A variety of sectors from defensive funds like those that focus on health care to growth funds like technology.

The idea, Piazza said, is to "define your objectives, include your risk tolerance, and then create a strategy that is well diversified."

3. Buy and hold, said Patricia Jennerjohn, financial planner and managing principal of Focused Finances in Oakland, Calif. And, remember that buying the current skyrocketing fund is a bad bet.

"Don’t chase last year’s hot fund," Jennerjohn said. "People need to understand if they buy an equity mutual fund, they better commit to a five-year holding period or they are going to be sorry."

4. Don’t worry about what your sister, friend, boss or barber owns. Go your own way and stick to your own plan, Jennerjohn said.

"There’s nothing worse than second-guessing yourself and being wrong," Jennerjohn said. "Long-term investing portfolios aren’t there for bragging rights. Bragging rights come when you get to retire when you want to."

5. Bring expectations back to earth. Remember that the market and varying sectors — even sizzling technology issues — don’t post stellar double digit returns year after year, said Vernon Lee, a financial planner who runs Lee Investment Consulting in Raleigh, N.C.

Investors ought to remind themselves, Lee said, that the 12 percent annual return that the Standard & Poor’s 500 index historically has enjoyed is indeed good and that 20 percent or more is hardly sustainable. He, like most financial planners, also espouses diversification.

"Many investors sort of loaded up on the latest and greatest, which was technology and which fell in the spring. It pays not to put all your eggs in one basket," Lee said.

6. Exercise what control you have over your mutual funds’ returns, said Scearce, the adviser from Lexington, Ky.

He recommends buying no-load mutual funds, which don’t carry sales charges.

Also, look into the recent turnover rate of the stocks within the fund to get an idea of how heavy your end-of-year tax bill will be. If a fund manager frequently sells stocks within the fund, it could mean a steeper capital gains tax bill if the holdings are sold at a profit.

7. Convert your traditional mutual fund individual retirement account to a Roth IRA, suggested Jo Anne Paynter, who heads Partnership Financial in Hilliard, Ohio.

The beauty of the Roth is that your nest egg grows tax-free. To convert, however, you’ll pay taxes now. But because your portfolio took a beating in 2000 — with all market indexes showing declines for the year — your tax bill won’t be as steep.

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