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Chapter 12. Looking for Mr. Goodfund > The Warning Signs: Is It Time for a Chan... - Pg. 125

Looking for Mr. Goodfund 125 Changing or Nearing a Goal As we have preached repeatedly, the funds that you pick should reflect the goals you have. And the risk that you take should largely be based on your time horizon (time to your goal). When the kids were 2 years old, putting 100 percent of their education fund into aggressive investments worked. Now that they are 17 and off to college in six months, it's not the time to be aggressive. Safety should be your focus. Life happens and goals change. Make sure that the strategies you put in place five or 10 years ago still work today. A Change in Direction A major topic of discussion these days is style. You bought a fund because it was a growth fund. But the manager has been buying value stocks. Most investors would not care, as long as the fund is performing well. The problem comes when the market goes down and, because all the stock funds that you bought are essentially the same, all of them go down with the market. As an educated consumer, you must compare what the fund said it would do against what it actually does. And how the fund does it is important. If you get a proxy or notice asking you to approve the fund's new objective or expense ratio or to relax any investment restrictions, read the information carefully and see if the "new and improved" version still meets your reasons for investing in that particular fund. Change in Control It's happening more frequently now, so be on the lookout for your fund company or fund family being merged or acquired by another financial services company. Deeper pockets mean better access to talent, technology, and research. This is good. But if the new boss wants to shake things up a bit, your favorite manager may say, " Hasta la vista, baby!" This is bad. Performance For most investors, this is what it all boils down to: "Did the fund make me money or not?" The confusion comes in how you evaluate performance. The easiest way is to look at a fund over 3-, 5-, and 10-year periods and compare the fund's returns against commonly accepted indices such as the MSCI EAFE for International Funds, the S&P 500, or the Russell 1000 for large-company funds; the S&P 400 for medium-size funds; the Russell 2000 for small-company funds (and don't forget their growth and value counterparts); the Lehman Bros. Bond Index for bonds; and T-bills for cash equivalents. This approach will average out a bad year and the one-year wonders. As a participant in a 401(k) plan, you have no control over the funds in your plan. That responsibility lies with the plan's fiduciaries. So, while the warning signs are important to you, they are even more important to the people who picked the funds for your plan. That does not mean that you should sit back and ignore major changes in your funds. If you become aware of a warning sign, we suggest a nicely worded "Did you know ...?" letter to the plan admin- istrator. It just might lead to action. The Least You Need to Know · Read the prospectus or at least the fund fact sheets to get the low-down on your funds. · Know how your 401(k) funds line up on the Market Risk-Reward chart. · Organize your 401(k)'s fund information to suit your needs. · Identify which funds in your 401(k) plan are pure growth, pure value, or a blend of the two.