Charles A. Jaffe | Change funds carefully, not nervously

With the market reaching new highs, but consumer confidence sitting in the weeds, it's no surprise that investors have questions. Here are a few of them that have recently been addressed to me.

Question: I was listening to Nightly Business Report, and one of the financial experts being interviewed said stay away from financial stocks. My problem is that I own Selected American Shares. It has experienced managers, but holds about 40 percent of its assets in financial stocks. With a slowing economy, how will this fund be affected? Should I reduce my holdings in it?- Michael S., Omaha, Neb.
Answer: With any fund that has a reasonable track record, the decision to back away from a fund depends mostly on the reasons you were attracted to it in the first place.

Most fund investors are looking for top-flight managers with proven strategies, and an investment philosophy they can relate to, in an asset class where they need coverage. Selected American Shares delivers the management, style and track record.

One advantage that Christopher Davis, manager of the fund, has is the ability to go anywhere. He can change the direction of the fund based on whatever opportunities he sees. No one complains or worries about that so long as he has gone to places they like. Financial services, right now, is a place that some analysts hate, thanks to problems in the subprime-lending business, slowing in the real estate market, concerns over the economy, and more.

If you trust Davis and believe in the fund, stay put. If you think the fund has gone too far afield - or if its holdings clash with others in your portfolio - consider making a change. But don't go crazy over what any analyst or market observer says; remember that if you have a portfolio with several different funds, you're probably not as overweight in financials as you think. If you were not trying to time the market when you bought the fund, do not let a timing decision get you out of it now.

Q: I recently started working with a financial planner, and she is trying to get me to move my current funds into new ones. Does this make sense? - Virginia,
West Palm Beach, Fla.

A: It depends on the reasons the change is being recommended and whether the new funds are better than the old ones, as well as whether you will incur any tax burdens or sales charges by making the change.

If the adviser is suggesting you move money into funds that have sales charges, the change is being made so that they can get paid. While a financial planner deserves a fair wage for her efforts, moving money for the sake of generating a commission is a bad idea. Obviously, if the new funds have a markedly better track record, if the adviser has inspired your confidence, and if the change can be made without taking a big tax hit, go for it.

But if you are reasonably happy with the funds you have and would get slaughtered on the tax and/or commission front, discuss with the adviser the idea of simply putting new investments into the suggested funds and shifting your portfolio over time. The adviser's current payday might be less under that circumstance, but it is a solution that lets him prove that he added value to your investment process without costing you an arm and a leg to find out.

Q: The stock market makes me very nervous. I had some stocks, but I sold them and moved into CDs. What kind of fund can I buy, and when should I buy it?- Ilene, Memphis
A: If the market made you nervous as the Dow Jones industrial average, the Russell 1000, Russell 2000 and Russell 3000 were all reaching record highs, there may not be a "right time" to buy a mutual fund.

If you are going to try owning stocks again and want to go with funds, consider owning an index fund, under one key condition - namely, that you would forecast the long-term future of the stock market as being "up" and that you could buy a fund and sit tight and hold it long enough to match that "up" prediction. The one key advantage that index funds have for nervous investors is that at least you will be sure to get the market's return; the one drawback is that you are strapping yourself to the roller coaster, so any time the market loses money, you will be down, too.

If your nerves have the best of you, and you will sell a fund - any fund - the next time it takes a little drop and economic conditions make you nervous, chances are that no stock fund will ever make you happy.