The Sell Decision With Mutual Funds: Knowing When to Walk Away
Many people hop in and out of investments all too frequently. That's due in part to the fact that mutual fund advice and information are so freely available that individuals often are persuaded to switch from their more prosaic funds to those that have been delivering more exciting short-term returns. At the opposite extreme, others take the attitude that, once bought, mutual funds can practically be held for a lifetime. That can be true in some instances, but it's often not—you really must rethink your portfolio periodically.
What are the legitimate reasons for selling funds, and when should you stay put?
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Lousy Performance
Continuing poor performance of a fund relative to a relevant benchmark and its peers is the number one fund-related reason for selling a mutual fund. You should focus on a fund's returns over the past one, three, and five years. Longer periods can be misleading if there have been major changes in the fund or its management.
While quarterly returns can be monitored to alert you to signs of deteriorating performance, one-year returns are the shortest relevant performance span for long-term investors to examine. However, that doesn't mean you should automatically sell if one-year returns turn up poor. Deciding how much time to give a poor performer to rebound is not easy, but you should seriously start to think about selling a fund that has lagged its benchmark and peers for the past 18 months to two years.
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