I am a buy and hold investor. I do not like to sell many of my investments. I’m decades away from retiring, and I’m a long-term investor, to say the least. It takes a lot for me to sell mutual funds that I own.
But, I have been known to transfer the assets from one mutual fund or mutual fund company to another one based on certain criteria. There are times that it is best to just sell your mutual funds and let them go.
Things change. Investing philosophies and goals change. Those are the reason to sell mutual funds.
Four Reasons When To Sell Mutual Funds
Fund Manger Changes Direction
You purchase a mutual fund based on its fund manager and the fund company’s investing philosophy and their stated agenda. Sometimes fund managers start deviating from their investment strategy based on conditions in the market and what is working.
It is called style drift when a manager starts sliding away from their original investment’s intent. Maybe your international mutual fund is started to drift into a global type mutual fund. Maybe your large capitalization mutual fund has started buying smaller cap stocks. You should continue to monitor your mutual funds’ performance and also read its prospectus to find out if its investing philosophy is changing over time.
One great reason that most people sell mutual funds is to rebalance their investment portfolio. Now is a great time to consider rebalancing your portfolio of investments. Most financial experts and planners recommend rebalancing your portfolio at least once per year to keep your asset allocation in check.
Maybe you have one type of mutual fund category in your portfolio has done better than others. Now you can have too much of your investment allocation over-weighted in one category over another. So, portfolio rebalancing is a reason to sell a mutual fund.
Mutual Fund Changes Managers
Another reason that many investors sell mutual funds is that a fund manager changes. Like any company, things change when a manager or leader of the mutual fund changes.
You should give extra credence to fund managers who have been running their mutual funds for a long period of time. It does not do much good if you pick a mutual fund with a great 10 year track record of stellar returns and a brand new fund manager that didn’t help the fund get those great rates of return.
Changes In Your Life
We all know that you are supposed to transition out of risky investments later in life as you near retirement age. You should also start to transition to safer investments such as bonds, certificates of deposit, and cash equivalents as you get closer to your investing goals. You may find yourself needing to sell mutual funds and transfer the funds into new, safer investments as you get closer to events such as retirement or your children entering into college for example.
Selling Mutual Funds in Retirement Accounts
I am very hesitant to tell someone to sell a mutual fund that is part of his or her retirement accounts, Roth IRAs or 401k retirement plan. But, you shouldn’t be hemmed into a poor investment if it is not working out for you though either.
Instead, consider conducting a direct transfer into another retirement account. You can call the mutual fund company and set it up with a simple piece of paperwork. Conducting a direct transfer will save you from being penalized by the IRS for making an early withdrawal.
Many investors take the funds out of their retirement accounts and have a check sent directly to them. They often fail to deposit it immediately into a new retirement account. There is a short time limit that you have to deposit the money into a new account before you get hit with a penalty. A direct rollover or a direct transfer from mutual fund company to fund company can help you avoid a needless penalty.
Are there other reasons that you sell mutual funds in your investment portfolio? I’d love to hear your thoughts in the comment section.