WITH MAJOR League Baseball's non-waiver trading deadline recently passed, the exercise of swapping players for the stretch run is something fund investors can learn from.
Think of your portfolio of funds as a team, each fund type as a different position and reaching your goals to be your financial World Series.
Viewed through that lens, it makes sense to examine your holdings, what's available on the market and see if making swaps can improve your squad.
As with any evaluation of talent, you have to be careful not to fall in love with what you don't have. The most popular player on any athletic team is the backup who shows a flash of potential that hints at being better than the starter; the problem with that player often is that there's a reason he's a backup.
Too many moves disrupt any team and short-circuit efforts to win. Too few can mean you're sticking with losers who give you no chance to win the Big One.
Trading investment players starts with self-evaluation.
Examine your portfolio to see if you have all of the positions covered appropriately. Review your asset allocation, consider rebalancing the portfolio to keep it in line with your financial plan and think about which fund types you have been meaning to buy but haven't gotten around to purchasing.
That overall view determines the scope of moves you might make.
If you have been following a long-term investment plan, the tweaking you need to make should be minimal.
Next, measure each fund on its relative merits and how it measures up to your expectations.
If a fund has been below average for its asset category for a significant stretch of time, that's when you start looking to make a change. Don't dump a player based on a current slump, because the logic that leads investors to make a change after a short disappointment also leads them to buy what's hot, a move that typically leads to an out-of-control portfolio filled with hot funds about to cool off.
When you buy a new fund, you should start your file on it with a list of things that led you to make the decision, ranging from the fund's characteristics at the time it was purchased to your expectations.
If you made this checklist, compare the fund against it. If you didn't write down your reasons for investing and your expectations for a fund, make the list now. In this way, you can answer the question, "Would I buy this fund again today?"
If you get ill while writing the list because the fund has been a complete letdown, it's time for a change.
Once you know there is a fund you might want to replace, do what the big-league general managers do and scour the world for talent.
Using sites such as Morningstar.com or Lipperleaders.com, look for funds that have the cost and performance credentials that excite you.
Now decide what kind of deals interest you:
Swap players at the same position.
This is the most straightforward kind of dealing, where you dump the fund that has been disappointing and replace it with something from the same asset class that you believe has better potential. This kind of trade keeps your asset allocation in place but upgrades your batting order.
Shorten your bench, but fill holes in your lineup.
Many investors have more than one fund in a certain asset class. There are worse things than owning, say, two or three large-cap growth funds, but having this kind of overlap does reduce your portfolio's diversification.
As a result, investors looking to spread their money around might pull cash from the crowded asset class to buy into something where they have no player.
Trade for a player to be named later or for cash.
If your evaluation tells you that a player is holding your portfolio back and you're not sure where to put the money, you can bail out on the fund while you contemplate the next move.
Ideally, you won't keep the money idle for long, unless you are looking to increase the cash in your portfolio.
Fire the manager and general manager.
OK, it's not a trade, but it sometimes is just what a team needs.
In the case of your financial team, this may mean replacing yourself with a financial adviser (or it may involve dumping your broker or planner because their decisions have proved problematic).
It's not an easy decision, but if you're not on the road to reaching the World Series and if you can't see yourself rebuilding the team in short order, it may be the right move to improve performance.
Chuck Jaffe is senior columnist for CBS Marketwatch. He can be reached at firstname.lastname@example.org or Box 70, Cohasset, Mass. 02025-0070.