Is It Time to Sell Your Mutual Fund?

by Miranda Marquit · 5 comments

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?

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{ 5 comments… read them below or add one }

vered August 31, 2010 at 12:13 pm

Great article, Miranda. I reevaluate my portfolio annually. The idea is to rebalance my investments, and also to get rid of underperformers. At the beginning of this year, for example, I noticed that I had a fund in my portfolio that did worse than the its peers both in the 2008 downturn AND in the 2009 rally. So I got rid of it. I also make sure that expenses and turnover are still as low as they were when I first invested in the fund, and that the fund hasn’t started to hold too much cash.

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Seo Guru August 31, 2010 at 5:43 pm

One of many reasons you may sell your mutual fund is when you see another fund that is worth buying. Sell it and buy the new one. You are in the buy and sell business, its best to sell on profit and reinvest it to some fund that you see will be profitable in the future. Don’t stale your investment, make your money work for you.

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basicmoneytips.com September 1, 2010 at 8:03 pm

One of the thing to consider is the expense ratio. I am becoming less and less a fan of mutual funds as opposed to EFTs or something out of the markey altogether. I recently dumped a fund and took the loss on one that had bounced around between 17 and 20 for the past 12-14 months. I sold it at 19.29 share and just like clockwork 2 weeks later was under 17.50. Those fund managers are just ripping most of us off.

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Cd Phi September 2, 2010 at 1:40 pm

I recently sold mine just because I’ve had it in there for a pretty good amount of time and I’m just ready to switch it up. I was lucky enough to get a gain from it but I did see it begin to slightly decline so I just opted out of it.

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Text Message Marketing September 16, 2010 at 10:21 am

I look at my mutual fund portfolio at least once a week and I like to sell them for a profit, whether they are stocks or mutual funds. I set my target at 15%. I sell 1/3 at 5% profit, 1/3 for 10% and 1/3 for 15%. Somethings 1/2 for 8% and 1/2 for 15-16%. If they don’t turn profitable in 12 months, I sell them for as little loss as I can after the 12 months. Simple strategy, works for me. I know I lost out on a lot of upside but I also stay constantly profitable.

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