A mutual fund means never having to stay forever
When the stock market tumbled in October, many people who had invested in mutual funds bailed out as fast as they could - or at least, as fast as their funds' telephone switching systems would allow. At the time, that seemed like a good opportunity to sell. But was it? There are always lots of brokers, financial planners, and advertisements telling investors when to buy mutual funds and which ones to buy, but the literature on when to sell is fairly thin.
The simplest answer to the question of when to sell - too simple, really - is never. Buy a fund with a long record of good performance and stay with it through thick and thin, ups and downs in the market, even changes in fund managers. An investor trying to time the market or pick the latest ``hot'' fund would have to be right 75 percent of the time to beat a simple buy and hold strategy, says the United Mutual Fund Selector, a newsletter published in Boston.
``You have to hold a mutual fund for the long term or it isn't going to work,'' says Patricia Ganley, the newsletter's managing editor. ``At least that's what I believe.''
But even Mrs. Ganley doesn't believe every investor should hang on to a fund forever. Neither do other advisors.
``For the real novice, the answer to the question of when to sell is never, at least to sell all of your mutual fund holdings,'' says Norman Fosback, publisher of the Mutual Fund Forecaster, a newsletter in Fort Lauderdale, Fla. ``You might, however, want to switch around from fund to fund, based upon which ones are performing best.''
Mr. Fosback believes most investors will be discouraged if they try to move in and out of funds. The average person whose horizons are very long-term, aimed at retirement, for instance, ``is better off simply buying mutual funds and putting them away,'' he says.
``This is for people who have no knowledge whatsoever about the market,'' he adds. ``People who have some working knowledge should trade based only upon major market cycles, major bear markets that might occur once every four years. Trading on a short-term basis, to step out of the market in term corrections that might last from two to three or four months, I think you're going to be very unhappy.''
Moving in and out of funds started several years ago with something called ``switch funds,'' Ganley recalls. These were the predecessor to the large fund ``families'' of today, where investors can move all or part of their money from one type of fund to another with a telephone call.
``We used to say `don't get into switch funds,''' she recalls. ``We still don't believe in it.''
She does believe in moving out of a fund under three broad conditions, however. The first is changing investment and personal goals. An unmarried individual of 25 has very different needs from parents in their 40s or a couple nearing retirement. In the earlier years, more risk may be tolerated in return for long-term growth. Close to retirement, risk is usually minimized and income is the goal.
A second reason to sell is performance. ``Poor performance is a good reason to consider selling,'' says Gerald Perritt, editor of the Mutual Fund Letter in Chicago. ``If your fund's performance is consistently in the bottom half of the funds of its type, like an equity capitalization fund, it may be time to bail out.''
An equity-oriented fund's performance should at least be equal to that of the Standard & Poor's 500 index for three of the past five years, Ganley says. If it isn't, the fund should be sold.
Mr. Perritt also is among those advisors who don't like big funds. ``When the fund becomes too big, you end up buying the market,'' he says. Since most investors prefer to have a fund that beats the overall market averages, they may be disappointed with a fund that has so much money it has to invest in hundreds of stocks to diversify. Perritt prefers to buy a fund when its assets are still under $200 million, and sell when it gets up around $600 million.
A third reason to consider selling is a change in managers. Although most fund managers work anonymously, a few are well-known, and their funds, even with assistants, are managed according to their investment philosophies.
If the manager leaves the fund, retires, or dies, Fosback says, investors should consider selling eventually, although ``there's no need to rush to get out in most instances, because the portfolio put together by the old manager is still there, and assuming he's done a good job, that portfolio should continue to perform well for the next few months.
``But as time goes on, it will become less and less the old manager's portfolio and more and more the new manager's portfolio. There's no reason to believe a new manager's going to be the same genius that the old one was, just because he worked under him.''
If you have a question that would make a good subject for this column, send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115.