3 Bad Reasons to Sell a Fund

Performance, especially, can lead investors to sell funds that they should hold on to

Christine Benz 15 August, 2014 | 12:37AM

The decision about whether to sell a fund is usually not clear-cut, even in hindsight.

After the dust has settled on a decision and the investment has performed well or poorly, the "right" answer is wholly dependent on the individual. It's difficult to arrive at selling criteria that fit every investor. But there are some situations when selling is especially ill-advised. Here are four of the key ones.

Bad Reason 1: Weak Short-Term Performance

It's almost never a good idea to sell a fund based on weak performance alone, whether short- or long-term. Instead, if a fund is lagging its peers or an index, your first move should be to investigate why that is. It could be that the manager is simply sticking with an investment strategy that happens to be out of favour, as was the case with many value-leaning funds amid the tech boom of the late 1990s. Such discipline is often vindicated over time. But weak performance may be a sign that something more serious is afoot—for example, perhaps your fund is lagging in a market led by small-caps and mid-caps because it's become too large and the manager can only put all that money to work in larger-cap stocks.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.

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