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If your fund becomes one of the worst performers, consider selling. However,
you need to look at more than just the fund’s rating. Consider these guidelines
for determining when to sell a fund:
- You may want to sell if you have overlapping stocks in your portfolio.
(For more about overlapping stocks, see the sidebar “Checking for overlaps
in your mutual funds.”) You can use the Morningstar Portfolio X-Ray
feature (portfolio.morningstar.com) to discover whether the two
growth mutual funds that you own are holding shares in the same company.
To stay diversified, you may want to sell one of the mutual funds
and replace it with another mutual fund.
- Look at the performance of comparable mutual funds using Personal
Fund (www.personalfund.com). If a similar fund’s overall performance
is down 10 percent, your fund is down 16 percent, and your fund’s performance
consistently trails its peers, your fund may be a loser.
- If your fund drifts from its original investment objectives, it’s not meeting
your asset allocation goals. This underperformance can become especially
problematic if the drifting fund spoils your efforts of diversification
and doesn’t meet your asset allocation goals.
- Keep track of changes in your fund’s management. If the fund hires a
new money manager, that person may have a different investment
strategy.
- You may want to sell if your mutual fund’s expenses have been creeping
up, if you inherited the fund, or if your broker sold you a fund with a
high 12b-1 fee. High fund fees reduce your returns and make the fund
less profitable than similar funds with lower expenses.
- In a volatile market, you may discover that you’re a more conservative
investor than you imagined. If you can’t sleep at night, sell your fund.
- You pay taxes on your capital gains. If one of your mutual funds posts negative
returns, consider selling the losing fund to offset your tax liabilities.
- If the fund increases by three or four times its original size in a short
time period and its performance starts to decline, you may want to sell.
As the fund keeps growing and growing, the professional money manager
can’t invest in the securities he or she knows and loves best, so
the fund may start to acquire poor or average-performing assets.
- Consider your needs. If you purchased the fund for a specific purpose
and your life circumstances change, you should sell the fund and purchase
one that meets your needs — even if the fund is doing well.
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