Newspaper article St Louis Post-Dispatch (MO)

When Should You Sell a Fund?

Newspaper article St Louis Post-Dispatch (MO)

When Should You Sell a Fund?

Article excerpt

Since the start of this year, investors have poured some $103.7 billion into mutual funds that invest in stocks. Most of those investors are happy with the results. The typical stock fund has gained 21.7 percent during the period, according to Morningstar Inc., the mutual fund tracking firm in Chicago.

Sooner or later, however, at least some investors will suffer setbacks in their stock funds. When that happens, they may be tempted to unload the shares they acquired this year. Should they?

The answer depends upon a wide range of factors. It almost never makes sense to sell shares in a mutual fund just because they have declined in value. Often, the decline is temporary, just a reflection of ordinary stock market fluctuations. If you sell your stock funds every time their share prices decline, you will never have a chance to accumulate the long-term gains that make stock market investing worthwhile. Alternatively, you could sell a fund if it fails to keep up with other stock funds. Trouble is, a fund that underperforms in the short term actually may be a sound investment. For example, many well-managed funds that buy small-company shares have lagged stock funds that buy blue chips during recent years. The reason: Blue chips have been in favor on Wall Street. As a result, however, the blue-chip funds own a lot of expensive stocks, while many small-company funds own bargain-priced shares. When small-company stocks rebound, some funds that have lagged the market could snap back with outsized gains. Some analysts argue that you should simply buy and hold your stock funds no matter what happens. That way, you'll avoid the temptation to sell a stock fund every time its investment approach falls out of favor or the market as a whole stumbles. But what if a fund really stinks? A recent study by Charles Schwab suggests that investors might be wise to sell the fund industry's worst performers. The study compared the performance of a portfolio of funds bought and held vs. portfolios that replaced underperforming funds. Some portfolios replaced the losers every year, others did it every two years and others did it every three years. …

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