Reader Ian is trying to decide whether to swap one mutual fund for a better performing one. Here’s what he had to say:
Thanks for answering my previous questions. One of my two funds has not been in the top 100 domestic mutual funds for the last two weeks (WPVLX). Would it be counterproductive to chase momentum and move my money to one of the higher M value funds? I’m looking at BPTRX.
Just because a fund moves out of the top 100 positions does not mean it should be automatically replaced. Let’s take a look at a 1-year chart and compare both funds along with the S&P; 500:
While BPTRX indeed is currently performing somewhat better than WPVLX, it is also a lot more volatile as you can see by the drop off during January’s correction (red arrow). This becomes even more glaring when you look at a 2-year chart.
With the market having advanced as much as they did, you want to hold funds with a little less volatility to better survive any inevitable pullbacks. Given that, along with only a moderate performance difference, I don’t see justification for a swap. Additionally, both funds have outperformed the S&P; 500 for the period shown.
Assuming that you have held WPVLX for a while, you would also start all over as far as the early redemption fee period is concerned, if you were to make an exchange. Or worse, if you are dealing with assets in a trading restricted 401k account, you might trigger other restriction issues.
The key is to limit trading activity and stay with a fund that is clearly on track and let the trailing sell stop tell you when it’s time to exit and lock in your profits.
Disclosure: No positions in the above funds.