Someone posed a variation of this question to Scott Burns recently, you might be surprised at his answer:
Hold on to a hand like this one
10:19 AM CST on Thursday, November 17, 2005
Question: I have my 401(k) divided across four Fidelity funds: Value, Balanced, Diversified International and Contra. Its management fees range from 0.67 percent (Balanced) to 0.94 percent (Contra). Based on the above choices and management fees, would you recommend that I try your "Margarita Portfolio" approach?
My thinking is that the above four funds give me good diversification and overall good returns annually.
B.J., by e-mail from Dallas
Answer: Don't do a thing. You've got a hot hand. Or your plan sponsor has.
Either way, your account is the exception that proves the rule – your fund managers are adding value while collecting reasonable fees.
Fidelity Contra, the best of your funds, is rated five stars by Morningstar. It has ranked in the top 5 percent, 15 percent, 1 percent, 3 percent and 2 percent of all domestic large growth funds over the last 12 months, three years, five years, 10 years and 15 years, respectively. At its worst the last three years, it has returned 1.89 percent a year more than the S&P 500 and has done better than 85 percent of its competition.
Fidelity Balanced and Diversified International are also solid top-quartile funds, rated five stars by Morningstar. The weakest fund in your portfolio is Fidelity Value, a four-star fund that has been in the bottom 50 percent of its peer group in six of the last 10 years.
Categorized as a mid-cap value fund, it has done better than the broader S&P 500 index over all time periods, largely because of the stock universe from which it selects. But it has also managed to be in the top 50 percent of its peer group over all trailing time periods ending Sept. 30. (This wasn't the case in other trailing time periods. From 1996 through 2000, it was in the bottom 50 percent of its peer group in each year.)
Rather than thinking about indexing, you should start monitoring your funds on a regular basis so you'll know if any need to be replaced with another managed fund or an index fund. There are several good tools for this.
One good source is www.fund
alarm.com, an independent Web site that tracks fund performance over different time periods and ranks poor performers as one-, two- and three-alarm funds. When a fund has become a three-alarm fund, trailing its category index for three time periods, fundalarm.com publisher Roy Weitz says you should consider selling the fund.
In addition to providing very valuable information, Mr. Weitz has a great sense of humor. In his site bio, he observes, "On the day that I was born, in New York, Elizabeth became Queen of England. She's looking a lot older, and so am I, but I've been less embarrassed by family members."
Morningstar data on funds are available on its site, www.morning
star.com, and on MSN Moneycentral at moneycentral.msn.com/ investor/home.asp.