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Unimpressed with your recent mutual fund balance statements? Thinking about selling a mutual fund but concerned about timing. Making the choice to sell a mutual fund can be a confusing and difficult one. However, there are a few simple guidelines to knowing when to sell a fund, according to a study from the Schwab Center for Investment Research titled, "A Prudent Approach for When to Sell a Mutual Fund."
For most investors, especially those with equity exposure and long-term perspectives, the "buy-and-hold" strategy-staying the course through short-term market dips-is an easy strategy to pursue and one that has been proven effective. However, when individual funds fail to measure up to market or peer performance, the study finds that you should consider selling the fund.
"The decision to sell a mutual fund is a complex one, and it's important to remember that the criteria for making the decision to sell are different for every investor." said Mark Riepe, head of the Schwab Center for Investment Research. "It's wise to take a closer look at the performance of your mutual funds, and perhaps, to sell underperforming funds and reinvest the proceeds in a new fund. An underperforming fund can have a serious negative impact on your portfolio's returns."
The Schwab study shows the importance of periodically evaluating your portfolio and provides some useful guidelines for making the decision to sell.
Following are some of the study's key findings:
• Evaluating your funds' performance, along with your financial situation every year, is a critical first step in your decision-making process.
• When evaluating fund performance, compare your funds with the most appropriate peer group. Comparing "apples to apples" is the only fair way to see if a fund is doing well or underperforming.
• If a fund hits the lowest quartile of relative performance in a given year, you should consider selling it. Note that poor performance alone in a given year is not necessarily a reason to sell.
• The best returns in the study came from selling funds that fell into the bottom quartile (funds that were outperformed by 75 percent of their peer group) for performance on an annual basis. If there is a reasonable explanation for the performance, it may make sense to hang in there.
• Finally, understand your unique financial situation, your capital gains tax consequences, your time horizon, and look at your portfolio with those realities in mind.
"If your fund's performance is in line with its peers, it may be better to stay the course until the sector, whether that be international or small-cap, is positive again," said Riepe. "What this study shows is that poor performance relative to similar funds may be a strong signal to sell. In the end, your decision to sell should be based on your view of your financial situation and your portfolio."
The Schwab Center for Investment Research emphasizes that the study findings should be used as guidelines, not mandates for evaluating a portfolio. Schwab does not offer advice regarding the nature, potential value or suitability of any particular investment for all situations. Data used in this report is gathered from what we believe are reliable sources but is not guaranteed as to accuracy or completedness. Past performance cannot guarantee future results.
The study also reminds investors to obtain a prospectus, which contains more complete information about management fees, charges and expenses and read it carefully before making mutual fund investment decisions.
To receive a complete copy of the study, "A Prudent Approach for When to Sell a Mutual Fund" or for more information on mutual find investing topics in general, visit the Schwab Web site at www.schwab.com or call 1-800-435-4000
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