WHILE IN COLLEGE, one of my roommates dumped a longtime girlfriend right before Valentine's Day.
"When it came down to it," he explained, "the situation called for a breakup more than it did a bouquet of flowers."
While that attitude is cold-hearted, it's not a bad one to have when it comes to your mutual funds.
At this time of year, when thoughts are turning to love, you should re-examine your relationship with a fund and decide what kind of treatment it deserves: bouquet or breakup.
Fund investments, unlike relationships, are free of the messy interpersonal stuff and are easy to end. Yet many people own bad funds and tolerate long-term performance that, compared with the rest of the field of suitors for their money, borders on abuse.
The dregs of the performance charts show billions of dollars invested in mutual funds notable only for mediocrity and a consistent ability to lag behind peers and disappoint shareholders.
The problem is that most people don't have an "exit strategy" for the funds they buy, no basis for dumping a fund after they purchase it.
Worse yet, many of the reasons people stay in floundering love relationships are the same reasons they hang on to a fund.
I can't help with the love stuff, but I can offer guidance on the fund side of things.
What follows are some excuses people use for staying in their bad-fund relationships. If these alibis sound like something you have said about your funds, chances are that you should break off your relationship rather than continue it.
"I'm too busy to look for something better."
Inertia is one of the biggest enemies of fund investors. If you dislike change and hate owning up to your own mistakes, a bad fund can stay in your portfolio for years.
Remember, a fund can be consistently dreadful just by lagging behind its peers and failing to give you a fair shot at the kind of returns you expect from its asset class. Just because a fund avoids the cataclysmic downturns and manages to stay in the black doesn't mean it's worth holding onto.
"It's really not so bad."
The story lies in the numbers, so whenever you evaluate a fund, compare performance with its peers. If it has consistently lagged behind the competition, it's sending you a signal that you might be happier with your money in those other, better funds.
"I'm waiting to get back to break-even," or "I'm waiting to earn back the load I paid."
Again, comparing investing to love, it's a bad idea to take the fairy tale approach and assume that, someday, your prince will come.
Not every fund rebounds, and not every investment story has a happy ending.
Even if you recoup your losses, you might be better off getting out now and putting your money on a faster horse that speeds your recovery.
Acknowledging mistakes takes guts. Most people have more guts than money, but they aren't using their nerves enough if they stay true to a fund that is either losing money or failing to help it grow at a reasonable pace.
"It has to get better."
No, it doesn't. A lousy fund can stink forever.
You may think you are bottom-fishing and about to catch a turnaround, but you could just be bottom food, the prey of some cellar-dwelling fund that is having your money for lunch.
Don't fall for "the gambler's fallacy," the belief that if a coin flip comes up "heads" four straight times, there is either a hot streak or a reduced chance that it will happen again. Each flip remains a 50-50 chance.
Some funds are consistent losers for a reason, notably poor management, high expenses or lack of discipline. Not every fund turns around; a bad manager is as likely to pick more bad stocks as he is to suddenly become a genius.
"My financial planner tells me to hold on."
You want a financial adviser to give you the emotional discipline to stay put whenever the market makes you jittery.
But that doesn't mean abdicating decisions entirely. If a broker-sold fund hasn't produced results, ask why; if you get neither answers nor alternatives, it may be time to change both the fund and the adviser.
"Everything looks fine in the fund's reports."
Of course it does.
Mediocre managers know how to put a shine on the sewage. If the fund's statements about prospects and performance have never appeared in your account statements, call off the romance. You truly are better off starting over than staying with the same miserable investment partner that you have now.
Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffeglobe.com or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.
Pub Date: 2/13/00