The Best Time to Sell Mutual Funds
Mutual funds allow even small investors to build a diversified portfolio by pooling money from many different investors and using it to buy a basket of stocks, bonds and other investments. While mutual funds are generally considered long-term investments, there are some legitimate reasons why an investor would want to sell one or more funds from time to time.
Other People Are Reading
-
When You Need Money
-
If you need money for other purposes, you might want to sell one or more of your mutual funds to raise the money. That is why it is a good idea to invest in stock mutual funds only with money you do not expect to need within the next five years. That five-year time horizon gives you time to ride out the inevitable bear (downturn) markets without having to raid your funds and suffer a loss. You can, however, keep short-term money in more stable investments like money market and government bond funds.
To Rebalance Your Portfolio
-
When you invest your money you should have a target asset allocation in mind before you begin. For instance, you might want to invest 70 percent of your money in stocks and 30 percent in bonds, or 50 percent in stocks, 30 percent in bonds and 20 percent in cash. You then buy a mutual fund to achieve that desired portfolio balance. But the performance of the funds in your portfolio can throw off your desired asset allocation, and you will need to rebalance your portfolio from time to time. For instance, if stocks have had a rough year, you might find that stocks now make up only 35 percent of your holdings, instead of the desired 50. You can adjust your portfolio by selling the funds that did the best and reinvesting that money in your stock funds. That allows you to buy low, and hopefully make even more money when the stock market recovers.
-
To Trim Your Holdings
-
Investing in mutual funds is easy, and as a result, many investors end up with a large number of mutual funds. In some cases this leads to duplication, especially for investors who hold several large cap or small cap mutual funds. You might want to sell a mutual fund to trim your holdings and make managing your portfolio easier. If you go through the annual reports you receive from each fund, you might find that several of your funds own a lot of the same stocks. If this is the case, you could sell the one that has been performing the worst and move the money into a better performing fund.
When Management Changes
-
If you are investing in a managed mutual fund you are, in part, investing in the expertise of the team that buys and sells the stocks. Over the years some fund managers have racked up impressive numbers, consistently beating the market averages year after year. The problem is that the performance of that fund is often so tied up with a specific money manager that when that manager leaves, the performance of the fund suffers badly. If you find that the money manager who has returned those impressive gains is moving on to greener pastures, you might consider selling some or all of your position in the fund. You could sit on the sidelines for awhile until you see how adept the new management team is at picking stocks, or you could follow that experienced money manager to a new fund.
-
