Five reasons to sell that fund
When it comes to mutual funds, buy and hold is generally sound advice. But it’s not the only road to wealth.
Time in the market, not timing the market, always produces the best gains, mutual fund companies will tell you. And, while fairly sound advice, it's not -- like many marketing messages -- the whole story.
Just as there are many theories on what funds to buy and when to buy them, there are also several reasons for selling.
Let's be clear: We're not talking about out-and-out market timing since there's considerable real-life evidence to show that most would-be timers are actually rather poor at their job.
Just as an optical illusion can fool us into believing that one line is longer than another when both are actually the same length, individual investors typically overestimate their ability to forecast and underestimate the odds that they face.
There are, however, still several good reasons to sell a fund, says Dave Paterson, who heads up fund research firm Paterson & Associates. These include:
1. Personal circumstances. If your personal situation changes, whether through switching jobs or having twins, you may need to adjust your portfolio's asset mix to reflect your new investment objectives.
In this case, you'd likely need to sell some or all of your current funds and purchase new funds that are more in line with your needs.
Or perhaps you just need to raise some cash. While you're supposed to invest for the long term, sometimes life gets in the way. Sell if you have to.
2. Better balance. Study after study has shown that asset mix is almost everything. Odd as it may sound, maintaining a risk-adjusted look to your portfolio can mean selling a fund not because it's a flop, but because it has been so good to you.
If one fund comes to dominate the portfolio because it's done so well, you could be increasing portfolio risk substantially by sticking with it, Paterson warns.
By rebalancing your portfolio, you're bringing your overall asset mix back into alignment with your investment objectives and risk tolerance.
Most people don't like selling a strong performer and replacing it with a seemingly lesser light. But maintaining the long-term reward/risk profile of the portfolio is far more important.
Of course, this might mean paring back your holdings of a fund, rather than dumping it altogether. And you don't have to turn your back on the whole fund family.
3. Changing markets. A buy-and-hold portfolio should prove fairly stable and require little effort or attention over the years. However, some investors take a more tactical approach with their portfolio, and adjust their portfolio's asset mix based on their outlook for the markets.
For instance, if you felt that interest rates had indeed reached their low point, your outlook for fixed income might appear less rosy. Because of this, you might decide to sell some of your fixed-income holdings and invest them in equities.
MSN.ca Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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