Given the fact that the stock market has run-up more than fifty percent from its closing low set just this past March 9th and almost everybody is telling you to buy, we thought it would be a good idea to identify at least some of the reasons why one might sell. Although there are many more reasons than those listed below, we thought limiting the number to ten might be a good idea.
The first reason for selling is that your situation has changed which may require a change in your asset allocation. Perhaps you have an upcoming college tuition bill, a wedding or your retirement looms in the near future.
The second reason for selling pertains to a change in the objective of the fund or perhaps an inadvertent drifting away from its objective. This can be as a result of the fund growing too large.
Reason number three, the fund is underperforming relative to other similar funds over an extended. Remember to always try to improve your portfolio.
Reason number four, the mutual fund has changed managers or its management. Many times the individual responsible for all of those gains is no longer at the helm. This is a yellow light.
Reason number five, the fund has high expenses relative to other similar funds. These days, gains are hard enough to come by without being encumbered by high fees and expenses. Your job is to weigh the fees relative to the returns generated by the fund given the level of risk you are assuming. Keep in mind that these fees can change over time and also these fees can be more onerous than other investment alternatives such as Exchange Traded Funds (ETFs).
Reason number six, after this fifty percent run-up off the bottom, perhaps you should rebalance your portfolio. This would entail selling some of one fund and buying into another.
As we enter the final quarter of 2009, for non-qualified, taxable accounts investors should investigate selling one of their funds to claim a loss on their tax return. For example, high yield funds may be solid performers, but given the fact that you pay tax on the interest/dividends every year, there may be an accumulated capital loss.
Reason number eight, you may own too many funds. Consider selling one to improve the quality of your portfolio and to reduce the number of holdings. Many investors are like kids in candy stores and accumulate way too many funds. This generally results in mediocre performance, something we wish to avoid.
Reason number nine. As many of you may have found late last year and early this year, you over-estimated your tolerance to risk. Now with stocks in an uptrend you are able to look objectively at your portfolio without the emotional turmoil you might have experienced near the lows six months ago. Determine your objectives and allocate your assets according to your risk tolerance, keeping in mind how you felt a while back.
Finally, the tenth reason you should sell a mutual fund is if you have some overlap of objectives within your portfolio. Perhaps you have two or three “large-cap, growth” funds. It may be time to trim one position keeping in mind reasons one thru nine prior to doing so.