Don't Let Small Losses Turn in to Big Losses

I received an e-mail last week from a client who wanted to know what his adult child should do with her position in a gold mutual fund that she owned in her IRA rollover account.

The stock market mutual funds that my client’s daughter owned were up around 15-20% in 2013.  The gold mutual fund that she owned was down about 35% for the year.

I told the client that if he owned the same gold mutual fund, I would have advised him to sell it months ago. My client was not surprised by this kind of reaction from me. He knows that we have a game plan in place for the management of stock market losses.

Earlier this year is was apparent that the U.S. stock markets were going up.  At the same time, gold prices were falling dramatically.  It was clear then that gold was not the place to remain invested.

It did not matter then why gold prices were dropping.  And it does not matter now.  Gold mutual funds were clearly not the place to remain invested earlier this year.

Unfortunately, my investment advice did not do the client’s daughter any good.  But this story does help illustrate one of the most important parts of a good investment management strategy.

The financial media writes and talks constantly about Morningstar or Lipper mutual fund ratings. Part of their story is to always make sure that you only buy mutual funds that have the highest ratings from those two mutual fund ratings services.  

Investment advisors like to talk about buying a portfolio of mutual funds that are diversified and do not move in sync with the stock market. Diversification is thought to be the main reason to own mutual funds in several different asset classes.  

All that financial marketing mumbo jumbo is worthless.  

You have to have an investment management game plan to limit your stock market losses on each and every stock market position you own. Put that game plan in place before things go wrong. Don’t let diversification or ratings take you down with them.

To remain diversified in any highly rated mutual fund that is falling off the edge of the world is just plan wrong.

Ric Lager
Lager & Company, Inc.