If a mutual fund lags the market for one year should i sell?Thanks,
Many investors make the mistake of using the past performance of a fund to make investment decisions. Individuals move money from lagging funds into whatever the hot funds were for the year. This often results in buying high, because the hot funds from the past year were bought, and selling low, because funds that lagged the market are sold.
When deciding to buy or sell a mutual fund, you should try to understand why the fund is lagging its indices. In some cases a fund may choose to invest to preserve capital, buying stocks that pay higher dividends or are otherwise stable but sluggish instead of the hot growth stocks in the makrret. In this case the fund will not perform as well as the indices when the market rises sharply, but may not fall as fast as the rest of the market during down periods. Such a fund would be inappropriate for someone who is trying to grow wealth quickly and who has a long investment horizon, but would make sense as part of a portfolio for someone who has already amassed wealth and would like to preserve it.
Likewise, the fund may be invested in segments of the market that did not do as well as others. If the fund is concentrated in healthcare companies and technology does well, the technology companies may lift the index more than the fund. This may very well mean that the technology segment is overpriced and the healthcare segment is due a rally. If one then sells the fund and buys one heavy in technology companies, one may be buying right at the top for the new fund and miss out in a good rally in the other fund.
The most important factor for virtually all funds are the expenses. Over time all funds will track the market returns, minus expenses. Rather than trying to find the hot mutual funds, buy a set of funds that cover the different segments of the market. In doing so, one will profit in one segment even if another segment of the market is lagging. When selecting funds, find those that have the least expenses possible (ETFs and index funds are good choices). Then, don’t worry about lagging the market – all will be made even with time.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing