Seven
Good Reason To Sell
You
need to Rebalance: Even if your investment goals
have remained the same and you have not tinkered with your asset
allocation, you will probably need to get your portfolio mix back
to its original state. If your stock funds didn’t fare well
in a given year, rebalancing probably will require putting more
money in those laggards.
The
Fundamentals Have Changed: Presumably, you buy a
small-value fund because you want exposure to small-value stocks.
If the manager starts buying large-value stocks, you may have
a problem. You may now have multiple large-value funds in your
portfolio and no small-value fund. You may need to sell one of
your large-value funds and pick another small-value one to restore
your original balance styles.
Be careful how you define a change in style. Sometimes
a manager’s stocks will change, but his or her strategy
won’t.
We mentioned that a manager change should be a yellow flag. To
decide whether you should sell, you need to assess how good the
replacement manager is. If the replacement already has a long-term
record at a similar fund, then it should be easy to figure out
if he or she is a worthy successor. If it’s a manager from
the same firm who doesn’t have much of a record, take a
look at the record of other funds in the same asset class. Some
families have deep other cases you’ll find that the firm
do a lousy job at most of their funds in an asset class and you
were holding the only good one. If that’s the case, it’s
time to bail out.
You
Misunderstood the fundamentals: Closely related
to changing fundamentals are misunderstood fundamentals. If you
buy a compact disc that’s cracked or a shirt that doesn’t
fit, you return it. Sometimes investments need to be returned,
too.
If your fund is overpriced, you could save a lot
of money and improve your returns by picking a cheaper option.
The fund Isn’t Living up to Your Expectation:
Although one year of under –performance may be nothing to
worry about, two or three years of falling behind can get frustrating,
to say the least. Before cutting the fund loose, through, be sure
that you’re comparing your underperformance to an appropriate
benchmark.
Taxes are particularly important in making your
decision. If you have owned your fund for a long time, you many
have built up significant gains, resulting in a tax hit when you
sell. Your new pick would have to make many percentage points
per year more to make up for the tax damage. If you think you
can do better but want to avoid the taxes, out new money to work
in a new fund. On the other hand, if your fund is down enough,
you can give yourself a tax break by selling. It could be a win-win
deal.
Surprisingly, you may also need to sell if your
fund is returning more than 10% per year, it’s probably
taking on more risk to achieve that return then you would expect
to come from the “boring ” part of your portfolio.
Your
Investment Goal Have Changed: You don’t invest
to win some imaginary race, but to meet your financial goals.
As your objectives change, your investments should change as well.
Suppose you start investing in a balance fund with the goal of
buying a house within the next five years. If you get married
and your spouse already owns a house, you many decide to use that
money for retirement instead. In that case, you may decide to
use that money for retirement instead. In that case, you might
sell the balanced fund and buy a portfolio of stock funds. Your
goal and the time until you draw in your investment have changed.
The investment should, too. For the same reason, bonds should
become increasingly prominent in your portfolio as you near your
goal.
You
Can Get A Tax Break: if your fund account is in
the red, it might make sense for you to sell and take a loss that
you can use to offset future taxable gains. Selling sooner is
instead of later is a particular good idea if the fund looks poor
for any of the preceding reasons. You can even sell a good fund
if you really need the tax break;
You
Just Can’t Take It Anymore: Even meeting your
goals isn’t worth it if you develop ulcers or wind up sleep-deprived
along the way. Maybe your fund is so volatile that no even the
vision of your brand-new house calms you down-every time the fund
takes a dip, you see yourself losing another room off your dream
house. Sell, by all means (so long as you never buy the fund or
a fund like it again).
The
moral Know your funds, know yourself, and never make the same
mistake twice. To avoid getting in that situation again, pay particular
attention to how your prospective fund invests and do the gut
check. Examine the fund’s worst annual and quarterly losses
and ask yourself if you would be able to stick out those periods,
not knowing if things might get worse, without undue stress.