One of the most difficult things to figure out in investing is when to sell something. The decision to switch things up can be a difficult one to make. What if you get rid of an investment, and it takes off? You’ve just lost out on big profits. Another concern is that you keep an investment that spirals downward, resulting in big losses when you finally decide you have to sell.
When it comes to mutual funds, though, many people don’t even think about switching things out. This is because many mutual funds are held in retirement accounts that don’t get a lot of scrutiny. However, it is a good idea to check your mutual fund holdings periodically to determine whether or not it is a good time to change things. Here are four situations that might warrant getting rid of a mutual fund:
1. Weak Management
One consideration is the strength of the fund manager. If your actively managed fund has constant turnover with managers, or if the current manager can’t seem to pull it together, it might be time to switch it up. No fund manager is going to be dead on all the time. There will be periods of poor performance; there is no avoiding that. But a long-standing track record of difficulty for that fund should raise red flags.
Another possibility is to switch to a fund that is not actively managed. You can save on mutual fund fees by going with an index fund or an ETF that does not require the same type of management seen in actively managed funds. You are more likely to keep more of your money — and see adequate performance.
2. Get the Diversity You Want
Turnover in mutual funds, along with the possibility that you did not pay much attention in your initial decisions, can lead to less diversity in your portfolio than you thought. Check your mutual funds. Is there overlap in the investments? If so, you may not be adequately diversified across asset classes, industries and foreign vs. domestic investments. Think about the diversity you want, and switch out mutual funds so that you have the sort of diversity you are looking for. This is a great thing to do when you are periodically checking your asset allocation, and remember to re-balance your portfolio to reflect changes as your approach retirement too.
3. Take Profits
You might have invested in a mutual fund for a particular purpose, because it was a good deal, or it had potential. If it is profitable, and you have made what you want from it (or possibly more than you expected), it could be a good time to sell. If the mutual fund is one that represents volatile investments, it might be a good idea to sell while you are ahead. If you are unsure that future performance will be as good as what you have so far, take your profits. You can then put that money to work into investments that are less volatile, and fit more with your long-term strategy.
4. Gain a Tax Advantage
If you have a long-term mutual fund in a taxable account, it might be wise to sell it at a loss to offset some gains. Run the numbers, and consult a tax professional, to see whether you might actually be better off selling — even though that loss will now be realized. You can take the cash you get and reinvest it in something else (watch out for the wash rule though), or you might even want to put add to your retirement accounts.
Editor’s Note: For most people, buying and holding is probably the best strategy for their money, but sometimes, selling an investment is definitely the most prudent approach. Miranda mentioned four, but there are many reasons why you may want to sell. Can you think of any?
Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.
They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.