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August 26, 2010

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While some of the changes made by a mutual fund may turn out to have a negative impact upon performance they are not a signal to immediately sell the fund.
There are three good reasons to sell a fund - they are PERFORMANCE, PERFORMANCE and PERFORMANCE.
Since the #1 rule for success in investing is: "Don't lose money", the most idiotic statement in this article is:

"Bad long-term performance. Don't sell a fund because of poor performance for a short period like 3, 6, or 12 months".

Once any investment is acting poorly and/or its asset class is in a downtrend you need to watch it closely and make a decision fairly fast or, before you know it, your profits are disappearing or you have a large loss. It doesn't matter about it's long term record, what matters is what it is doing now.

Assuming that you have the means to analyze and compare the performance of hundreds, if not several thousand, mutual funds, as soon as one of your holdings is underperforming its asset class, or the whole asset class is being dragged down for some good reasons, you have to get to work and find a replacement ASAP. If you cannot find an investment that is in a nice, low volatility uptrend, then sit on the sidelines and continue to monitor the funds that are available to you until you can.

If you don't have the means to analyze the performance of hundreds, if not thousands of mutual funds then you need to obtain help.

As shown in the following table, I started managing my investments on 12/28/92 and have not had a losing year since. The table is sorted by "Maximum Drawdown".
UI% is the Ulcer Index, a measure of volatility.
ANN% is the annual compound rate of return.
UPI is the Ulcer Performance Index, a measure of the risk adjusted rate of return.
MDD% is the percentage Maximum Drawdown and the date it took place.
As you can see, over this 18 year, 8 month period my worst drawdown was 15.90% whereas the Buy and Hold drawdown for the market indexes ranged between 54% and 78%. Some readers may know what it feels like to experience a 54% drawdown. There is no way I could suffer through such a drawdown especially when at the time of that huge loss you have no idea what the future holds.

.....................................UI%........ANN%........UPI.........MDD% and DATE.........START............END
Old Limey...................4.57.........18.45........2.85.........-15.90 .....03/25/00..........12/28/92....08/25/10
Dow 30....................14.05...........7.60........0.16..........-53.78.......03/09/09..........09/01/88 ....08/25/10
S&P500...................18.57...........6.61........0.06..........-56.78......03/09/09..........09/01/88....08/25/10
Nasdaq....................40.59...........8.27........0.07..........-77.93.......10/09/02..........09/01/88.... 08/25/10

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