When does it make sense to be selling mutual funds?
I dislike market drops as much as the next red-blooded capitalist. And maybe you should flush your fund…but if so, make sure you do for the right reason. And the right reasons are a byproduct of your mutual fund evaluation process.
Here are some good (and bad) reasons why people sell their funds:
Bad Reason #1 – The Market Is Tanking
Do you know how many calls I get complaining about a fund when the problem is the market? Too many.
All ships rise and fall with the tide. You might have a fund that’s dropped quite a bit – but still less than the market. Just because the market has taken you out, don’t assume it’s because you have the wrong fund. If you sell a good fund in a bad market, you might be throwing the baby out with the bath water.
Good Reason #1 – The Market Is Tanking
No…I’m not trying to drive you crazy or cause you intellectual whiplash. Depending on your investing strategy, you might want to sell as the market gets weaker. But – and here’s the rub – you have to have a strategy and stick with it.
The strategy that I use happens to be “market sensitive.” That means I buy and sell funds (yes…even great funds) as the market dictates. Based on the criteria in my strategy, I buy and sell at different times. The market might be strong and I’ll upgrade to a better fund. I might do the same thing in a weak market…or I might sell a fund in order to reduce market exposure.
Is this strategy always better than buy-and-hold? Nope. Over the long run, I believe it is a better fit for my clients, but this approach doesn’t outperform every time.
Bad Reason #2 – Mutual Fund Manger Changes
If your strategy is based solely on performance, you shouldn’t care if the fund is run by a monkey or a PhD. Follow the numbers…they’ll tell you what to do. Don’t assume it’s time to leave just because the fund manager changes if your strategy is performance-based. Follow the numbers…don’t try to predict what they’ll be.
Good Reason #2 – The Fund Manager Is Replaced
Can you guess what I’m about to share with you? Right. If you pick your funds based on long-term performance (not something I recommend, but you’re over 21 and you’ll probably do what you want) one of the success ingredients is likely the manager. If that is your strategy and that success factor is no longer in place, you might migrate your funds to the next-best performing fund with a seasoned manager in place.
Good Reason #3 – Your Objectives Change
This is one reason to sell your funds that always makes sense. If you reach a certain milestone in life and your financial needs change, you might need to change your portfolio. If that’s the case, get to work. Just make sure you aren’t confusing a change in your objective needs with your temporary change in appetite for risk.
Bottom line?
Your strategy should dictate your buys and sells. Not your emotions.
Are you buying or selling now? Why? Do you have an investment strategy? What is it?
This is a post all of your clients and any other planner’s/advisor’s clients should see. It’s easy for people to get scared when drastic dips in the market happen and it instinctive and irrational to want to rip everything out of the market and stuff it in a mattress..knowing that it’s safe makes people feel warm and fuzzy even if it costs them an arm and leg to get the funds to the mattress along the way. I can’t stress having a strategy and sticking to it enough!! Everything that happens in a portfolio should happen for a reason especially when life events dictate changes. Great post!
I tried to retweet this article but I kept getting an error. It said the link didn’t point to the right article. Just thought I’d let you know. I’m going to try to retweet again in a bit. 🙂
Thanks Nunzio,
I’ll check this out….
And thanks for your kind words as always…I agree. STRATEGY BABY!!!!