| The media has no trouble telling you what funds | | | | (asset class). If your utility fund was down 2% |
| to buy and when, but finding advice on when to | | | | and you found out that the average utility fund |
| cut a fund loose is much harder to come by. | | | | was down 4%, then this is not a good enough |
| Sometimes parting with a mutual fund can be a | | | | reason to sell it. It helps to compare your fund to |
| difficult task. Other times it can be quite easy. | | | | its peers by looking at the 1-year, 3-year, and |
| More often than not, investors tend to sell their | | | | 5-year performance. If it has underperformed the |
| mutual fund holdings for the wrong reasons. So | | | | average of its peers in all cases, then you have |
| before you make a hasty decision, please read | | | | good reason to sell your fund. |
| the following list of the correct reasons to sell a | | | | The Fund Manager Has Changed A simple change |
| mutual fund investment: You Need the Money | | | | of fund managers, in itself, is not enough reason |
| Sometimes there will be circumstances in your life | | | | to sell a fund on a short-term basis. If it is a |
| when you must sell your investments. It is | | | | passively managed fund (index fund), then you |
| important for you to weigh out alternatives to | | | | have little to no reason to worry. If it is an |
| selling your investments because it could really | | | | actively managed fund, then you should keep on |
| hurt you in the long term (see "The Power of | | | | eye on the new manager. Give the new manager |
| Compounding Interest"). | | | | a few years before you decide to cut them off. |
| You may be able to get a loan or borrow the | | | | Believe it or not, there are plenty of quality fund |
| money. If you can get a rate lower than your | | | | managers to replace your manager no matter |
| expected returns on your investment, it might be | | | | how good he or she was. |
| best to hold off on selling your investments. | | | | The Fund Size Has Changed Sometimes size does |
| Your Situation Has Changed If you are at a | | | | matter! One great example is a small cap fund. A |
| different stage in your life, you may want to | | | | small cap fund manager may be great at picking |
| consider selling your fund. As you near retirement, | | | | small company stocks and their success can |
| you may want to consider more conservative | | | | often lead to their failure. Here is an example: |
| funds. If you get married, you may need to | | | | Fund Manager Joe is great at picking a portfolio of |
| compromise your risk tolerance and desired | | | | 30 small company stocks. |
| returns with that of your spouse. | | | | His success brings a lot of attention to his fund in |
| The Fund Has Changed Its Style or Objective It is | | | | the media, resulting in a large increase in assets in |
| important to consider your original reason for | | | | his fund. |
| buying a fund. If you bought a small cap fund to | | | | The problem is that he now has such a large |
| help diversify your portfolio, but you notice that it | | | | amount of money to dump into these small |
| is investing in large blue-chip companies, then you | | | | stocks that he may end up owning 10% of a |
| should consider selling that fund. | | | | particular stock, which leads to liquidity problems |
| The Fund is Underperforming This reason for | | | | (because his fund becomes a major shareholder |
| selling, although valid in certain conditions, is where | | | | of the stock). To get around this problem, he has |
| most investors make a mistake. When calculating | | | | to hold more stocks. It was tough enough for him |
| performance don't look at too short of a period | | | | to pick 30 quality companies, but now he is |
| and don't compare apples to oranges. | | | | forced to find 50 or 60. |
| It is important to base your decision on relative | | | | The Fund's Expense Ratio Rises A small rise in an |
| performance not absolute performance. When | | | | expense ratio is not a big deal, but when you see |
| your fund is down 5% while other funds or the | | | | a significant rise you may want to consider selling |
| market in general are up 10%, it is very tempting | | | | the fund. In the case of bond funds or money |
| to switch over to what is "hot." This is called | | | | market funds, it is highly unlikely that the fund can |
| "Chasing Performance" and is the best way to | | | | increase its returns enough to justify an increase |
| shoot yourself in the foot. | | | | in the fund's expenses. |
| When studying relative performance, you look at | | | | Remember, these expenses only subtract from |
| your fund and compare it to its peers. If your | | | | your returns. |
| fund is a utility fund, you should not be comparing | | | | If you were considering selling your fund and the |
| it to the S&P 500. When choosing a benchmark, | | | | primary reason for selling it was not on the list, |
| you must select funds in the same category | | | | you may want to reconsider. |