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When to Sell
Mutual funds are unusual animals in their own right. You make the purchase,
buying shares in a fund with all of the high hoped optimism of a child at the
circus. You want performance. You want the golden ring. You want to be the
one who makes his/her wealth easily with little effort other than sending
money off in the mail.
But things aren't always that easy. Funds falter, markets stumble, and things
change. You change. Things like the fund manager, or the focus of the fund.
Sometimes funds become large and close their doors to new investors.
Sometimes funds simply lose their way, trying to find the right place to be
based on their research. Sometimes this causes you to wonder, "should I sell?"
If you ever invest in individual stocks, sage wisdom demands that you do two
things. Know when to sell, and follow your own plan. Selling individual
stocks is as easy as naming a percentage that is tolerable to you. If an
individual stock falls below a certain mark, usually 8-10% of what you paid,
you sell. If you determine that a profit of 25% is acceptable, you should
also sell. But those numbers ask too much of the investor. They require deep
self examination, courage of conviction, and the blind hope that you have
done the right thing.
If you are a mutual fund manager, you back those same types of convictions
with research and you follow the plan that is usually laid out in the fund's
charter. If you say you are a growth fund, buying large capitalization
companies, you shouldn't be looking at small cap value plays. The folks that
have entrusted you with their hard earned cash have done so for good reason.
They know what kind of investor they are. They want you to invest with
discipline, and they want you to make money.
So why does it become so difficult to sell a fund? Because you have a
difficult time knowing when that time has arrived. Over the last two years,
the overall market has suffered with the average diversified fund down almost
15%. This same group is barely over 2% for the past three years. Should you
have sold or continued a disciplined dollar cost averaging strategy?
I think the later, and I'll tell you why.
Within the market, there will always be better performers than others. But if
the group as a whole does better, for even as little as one quarter, and your
fund has failed to keep in step, you should probably take a look at your fund.
Small caps will have their day, but not usually at the same time the big caps
will. Value will shine when the bear is in town, but growth and all of its
volatile brethren will do better once confidence in the market returns.
One of the best indicators happened just recently and is an excellent time to
take a look at your holdings. After two years of finding out who could go
lower, the markets rallied quite nicely in the fourth quarter of last year.
If your fund failed to find its footing in this recovery, then you should
probably begin to ask yourself why. And if the answer is not to your liking,
sell the fund.
You don't often have access to all of the insider news about whether a fund
manager has lost his touch, but you can start to keep a closer eye on a fund
that is no longer as lustrous as it was when you were originally attracted to
it. If your fund changes investing styles, and they don't suit your
temperament, sell.
If a fund changes managers, it may be time to watch it more closely, unless the
manager was a promoted member of the team. The best way to determine whether
you have a fund that is no longer the star of your portfolio is to figure out
whether it has reached an average benchmark. You can click here to find out
how you did based on each sector:
Selling shares of a mutual fund is not as difficult as you might imagine.
Often, if you want to keep the money in the same family, a telephone transfer
from one fund to another is all it takes. You only need to involve yourself
with the paperwork, when you are transferring money from one fund family to another.
But once you do decide, feel okay about your decision. It is your way of
showing your dissatisfaction with the fund manager and his/her abilities.
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