4 out of 5 fund managers can be wrong

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The stock market hasn�t given much in the past year, and neither have mutual-fund managers.

Diversified U.S. stock funds lost almost 3% in 2011, while the Standard & Poor�s 500-stock index SPX �was flat on a price level and up about 2% counting dividends.

The year was especially tough on large-cap- and midcap-stock fund skippers. Just one-in-five large-cap managers were able to outperform the Russell 1000 benchmark, according to Bank of America Merrill Lynch. Just one of every 10 large-cap-growth managers beat the bogey.

A similar fate befell midcap-stock funds; only one-in-four such managers outdid the index.

Small-cap stock fund managers had much better results. About 60% of both small-cap-core and small-cap-value funds beat the Russell 2000 benchmark. But 55% of their small-cap growth counterparts lagged.

Now it�s true that a majority of fund managers fail to beat a benchmark index in any given year. That�s precisely why investors shouldn�t be hasty to sell a fund after a lousy 12 months.

It�s tempting to dump a poor-performer, but one year really isn�t long enough to judge. If all that�s disappointed you about the fund is short-term performance, while fees, research, investment style and other fundamentals haven�t changed, then don�t convict the manager � instead, stick with your convictions.

If the fund trails for a second consecutive year, or becomes more volatile, then it�s time for a �hold or fold� moment. Owning a fund for at least three years is ideal, as it reflects a market cycle.

To be sure, don�t make an investment and then forget it for a couple of years. In this volatile and unpredictable market especially, frequent review is wise. Investors need to hold fund managers and investment advisers accountable, so stay informed about what they�re doing with your money and why.

It�s just that acting out of frustration and anger won�t get you far. As my mother (and maybe yours) would say: �Don�t cut off your nose to spite your face.�

� Jonathan Burton, Money & Investing Editor