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Five ETFs to Let Run

It's never a good idea to sell an investment just because it's up.

Paul Justice, 04/27/2010

Imagine for a moment that you timed the market brilliantly, exited stocks back in September 2008, and re-entered the market exactly one year ago. Chances are, with just about any stock mutual fund or exchange-traded fund you purchased, you've done better than you would have by simply holding cash. The decision to simply enter the equity market paid off in spades. But now, perhaps, you're feeling like your luck has run its course. You've ridden this horse long enough, and now it's time to jump onto a fresh set of legs.

Alternatively, imagine that you actually stayed in the market through the turmoil of 2008 and the subsequent rise of 2009 and the last four months. You feel much better now than you did 16 months ago, but you are still down a material margin. If this describes your situation, chances are that you feel like you should continue to stay the course, because you need to make up those losses.

In either scenario, you are letting your emotions get the best of you. Regardless of whether you entered the market a year ago, three years ago, or three decades ago, your investment performance alone should not dictate your investment decisions today. After all, investors who entered the market at any of those three periods could have the exact same portfolio today, even if they have differing perspectives as to how well those funds have treated them.

If you have a solid asset-allocation strategy, the solution is simple: Only rebalance your portfolio when absolutely necessary (your risk tolerance or investment horizon has changed), which may include selling a portion of one position to add to another. Perhaps this Zen-like state of portfolio maintenance is too benign for you.

Even if you are only talking about the more tactical "satellite" portion of your portfolio, selling simply because the market has risen is a bad idea. Not only will you incur transaction and unnecessary tax costs, you will now have the chore of reallocating that capital to a better idea.

Now, you could take the momentum approach and buy the fund that outperformed yours over the past year, but chasing performance is hardly a formula for success over the long haul.

In this example, we've limited the sort to two simple criteria. First, we sorted by funds that have returned more than the S&P 500 over the past year, so we selected Market Return 1 Year from the Performance criteria dropdown menu. We then set the range to returns ranging from 40% to 300%. Then, we added the Price/Fair Value metric from the Valuation criteria and set our criteria to a range between zero and one. The end result: Our analyst staff finds there are several funds that both have outperformed the domestic large-cap market over the past year and that are still undervalued in aggregate. Below is a summary of five such funds that, if we already owned them, we wouldn't part ways with just yet.

iShares MSCI EAFE Index EFA
One-Year Return: 42.2%
P/FV: 0.87

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