When Should Someone Sell a Mutual Fund?


Ask SmallInvy

Dear SmallIvy,

I was wondering when someone should sell a mutual fund.  I have a few that have not done as well as the market over the last year.

Thanks,

Rick

Dear Rick,

Here are the only reasons to sell a mutual fund:

1.  You made  a mistake when purchasing and bought one with high fees.  Because mutual funds follow the market, the only difference in performance over long periods of time is due to fees.  Make sure your funds have low fees.  Index funds and ETFs are great for this reason.

2.  You have a fund that has done really well, causing the allocation of your funds in that sector of the market (for example, large caps, small caps, foreign stocks) to be too large a percentage of your portfolio.  In general you should pick an asset mix based on your objectives and rebalance periodically to return to the desired mix.  Note this has the desirable effect of selling those sectors that have done well (selling high) and buying those sectors that have not done as well (buying low).

3.  You will be needing the money in a few years and it is too risky to leave the money invested and taking the chance that a market fall will occur.  Remember that stocks are for long-term investing (greater than five years).  If you’ll be needing the money, you should settle for the pitiful returns of CDs for the security they provide.

Notice that the fact that “the fund performed poorly relative to its peers” is not on the list.  If a fund is doing poorly, take a look at the fees and the investment objectives.  If you decide that the fees are reasonable and the objective is what you think it is, stay with the fund.  If you sell your fund and buy the hot fund of last year, chances are you’ll be selling a basket of discount stocks and buying a basket of overpriced stocks.  Unfortunately, this is what many people do.

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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.

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