Deciding to Sell a Fund Can Be Difficult

[AP / MEG RICHARDS, AP Business Writer]

NEW YORK (AP) -- When your home or car no longer suits your
lifestyle, it's usually pretty obvious. But knowing when to sell a
mutual fund that no longer fits your portfolio can be more
difficult.
For most investors, buying shares of a mutual fund, a stock
or a bond is a big deal, so it makes sense to research the options.
We're rarely so analytical when it comes to selling, however, and
sometimes we just never get around to it. But if you're focused
solely on the accumulation of shares, you might wind up with a
disorganized portfolio, and that can cut into your overall return.
"The selling process is emotional and psychological. People
can feel very attached to funds and stocks," said Vernon Lee of Lee
Investment Consulting in Raleigh, N.C. "Sometimes people end up with
portfolios that don't make sense at all; it's just a hodgepodge of
stocks, and they need to prune it."
Inexperienced investors often collect mutual funds that
overlap, Lee said. For example, investors might believe their
portfolios are diversified because they own several different funds,
but they're oblivious to the fact that the funds are all
growth-oriented with many of the same holdings. Others like to snap
up shares of hot funds when they hear pundits talking about them,
but are reluctant to sell at a loss when they underperform.
If you're wondering whether your portfolio needs some
trimming, there are a few questions you can ask yourself, starting
with why you bought the funds you own.
"If you were looking for a fund to fill a specific niche in
your portfolio, and it's not living up to what you thought it would
be, that might be a reason to consider selling," said Christine
Benz, associate director of fund analysis at Morningstar Inc.
If a fund has changed significantly while you've owned it,
you need to make sure it still fits in with the rest of your
investments. A shift in sector focus or style isn't always a signal
to sell, however. Many of the best managers seek opportunistic
values among beaten down stocks, which means their portfolios will
change with the market cycle. But if the manager seems to be veering
from the true spirit of the fund, that could be cause for concern.
Whether the fund has changed or you misunderstood its
fundamentals in the first place, you should evaluate its performance
against an appropriate benchmark, usually a stock market index,
before you decide to sell. Look for striking deviations, both
positive and negative. If your fund has dramatically outperformed
its benchmark, that could be a warning that the manager is taking on
too much risk.
One effect of the bear market is that it gave investors an
idea of how different funds will behave in a variety of economic
climates. If a fund has not distinguished itself in any type of
market, it might be time to cut your losses. Or perhaps you've
learned you're less hungry for risk than you thought.
"It's never too late to sell because of volatility," Benz
said. "People have a tendency to want to hang on and try to break
even. ... If you bought a tech fund in '99 or 2000, and the losses
you incurred during the bear market were just gut-wrenching, it's OK
to sell."
Mergers of fund providers can also pose a worry, as they
often lead to management upheaval. And then there's the
market-timing scandal -- if the company running your fund has been
fined for tolerating improper trading practices that cut into the
returns of small investors, you might decide to take your business
elsewhere.
Many of the companies involved in the case have been
associated with other types of shareholder unfriendliness as well --
such as rolling out gimmicky funds and charging extremely high
management fees.
Also on the topic of trust, how did you come to buy the
shares? If you were assisted by a broker working on commission, he
or she might not have been putting your interests first, said Jack
Waymire, author of "Who's Watching Your Money?" a book about how to
select a financial adviser.
"Anybody who restricts your choices ... that's a big, big
red flag," said Waymire. "If they try to restrict your choice by
limiting you only to proprietary funds, or a single family's funds,
watch out."
Some brokers and advisers win higher fees for selling their
own company's products, or funds from a preferred list of fund
providers. A number of large companies have paid millions to settle
charges they failed to properly disclose such arrangements.
But the most compelling reasons to sell are often more
personal, said Lee, the consultant in North Carolina.
"Probably the biggest reason why you should sell has to do
with the overall big picture," said Lee. "If your goals have changed
... or your lifestyle has changed somehow, that's always a reason to
take a closer look at your portfolio."
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On the Net:
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