Five reasons to sell a mutual fund
The market's volatility early this year isn't the only reason to make an adjustment to your portfolio.
A Wall Street street sign marks the intersection outside the New York Stock Exchange.
Mark Lennihan/AP/File
The market聽opened 2016 with its worst-ever start to a year, and the subsequent two months have showed a series of ups and downs.
Because of that you鈥檙e likely to see some scary numbers when you check your portfolio. But it doesn鈥檛 mean you should react. Experts鈥� advice to long-term investors remains the same: Turn off the news and stick with your plan.
However, don鈥檛 interpret that as a recommendation to never change your holdings. Here are five signs that it might be time to sell a mutual fund.
1. It鈥檚 exhibiting outsize performance.
This might sound counterintuitive 鈥� after all, performance equals return. But outsizeperformance is another matter: If a fund did significantly better than its peers, you want to find out why, says Paul Jacobs, chief investment officer of Palisades Hudson Financial Group.
鈥淔or example, a fund could be borrowing money to boost returns or making investments you weren鈥檛 aware of,鈥� he explains.
Dramatic short-term gains could quickly turn into a crash-and-burn scenario. , such as the Standard & Poor鈥檚聽500 or theRussell 3000 index for example, and take note of any outperformance of 5% or more.
Then research the fund鈥檚 holdings on its website, Jacobs says. 鈥淭his should include information such as top 10 holdings聽and allocations to different industries or countries, which may be enough to get comfortable. If you want to see the entire breakdown of holdings for a fund, you may have to review the fund鈥檚 official disclosure documents, which should also be on its website.鈥� 聽Look for investments or manager activity that isn鈥檛 in the fund鈥檚 stated investment strategy, or that you aren鈥檛 comfortable with, like illiquid holdings or currency speculation.
2. It鈥檚 showing signs of 鈥渟tyle drift.鈥�
Actively managed funds typically carry higher expense ratios than those that are passively managed; investors are paying for a professional to pull the levers. But as a manager鈥檚 style gradually changes, a fund can experience 鈥渟tyle drift,鈥� Jacobs says. Among other issues, this can cause a fund to essentially track an index, such as the S&P 500 鈥� while still charging a premium.
鈥淥ver the long term, these 鈥榗loset鈥� index funds tend to underperform their benchmark聽because of the management fees,鈥� Jacobs says. 鈥淏y monitoring a fund鈥檚 holdings periodically, you should be able to tell if the fund鈥檚 strategy is remaining consistent, or if there are shifts happening that you disagree with.鈥�
3. It鈥檚 time for you to rebalance.
Rebalancing returns your portfolio to its target asset allocation. Some investors rebalance on a regular cadence. Others do it when their allocation shifts by a certain amount 鈥� for instance, when stocks do well and their returns take up a greater share of your portfolio. A portfolio made up of 60% stocks and 40% bonds could quickly become a 70%-30% split instead.
When you , you sell winning investments 鈥� in this case, mutual funds 鈥� and use that money to buy additional shares of funds that haven鈥檛 performed as well.
4. There鈥檚 a less expensive 鈥� yet comparable 鈥� option.
It鈥檚 worth regularly checking whether there are funds similar to the ones you already own, but with lower . Within a or , you have access to a large selection of funds. (401(k) offerings are typically more limited.) Index funds and ETFs are increasingly competing on fees, which drives costs down.
鈥淚f two investors have half a million dollars in something that is virtually identical in terms of investment philosophy and positions, but one is an index fund and tracks the market and the other is an actively managed fund that has similar performance, the difference [in what you鈥檇 pay in fees] could be 75 basis points,鈥� says Forrest Baumhover, a financial planner and founder of Westchase Financial Planning. That amounts to almost $4,000 a year.
5.Your risk tolerance has changed.
It bears repeating: A stock market fluctuation isn鈥檛 a reason to change your portfolio. But if you鈥檙e feeling less able to ride out those fluctuations 鈥� whether your current investments keep you up at night, or your goals have changed 鈥� it might be time to switch to funds more in line with your current risk tolerance and goals.
鈥淒etermine how much risk you need to take to meet your goals,鈥� Baumhover says. 鈥淭here鈥檚 no reason to be going out there on a more aggressive scale if you don鈥檛 have to.鈥�
This article was written by and was originally published by聽. Arielle O鈥橲hea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: .