If investments were people, mutual funds would be your calm friend. You know, the one you call after a breakup, or when your baby is sick. Your funds might not raise the roof the way individual stocks can, but they'll also keep you from getting too low when the market is down. That being said, funds -- like friends -- aren't always able to come through for you. Knowing when to keep your money in a fund, and when to sell it, is one of the toughest calls for an investor.
Know Your Horizon
One of the most important things to remember is your investment horizon, or how long it will be until you need the money. If a suddenly shaky fund is part of your retirement plan, you probably have 20 to 35 years to play with. In those circumstances, a six-month dip in the fund's value is nothing to worry about. However, if you were planning to cash out that investment within the next few years, it probably deserves closer scrutiny.
Consider the Fund
Don't make hasty decisions about holding or selling a fund. Instead, look at its fundamentals. If it has a long history of solid returns, if the management team is still in place and its current portfolio is in line with the fund's long-term strategy, it's probably still healthy. Remember, high-return growth funds are likely to have more ups and downs over the years than more conservative funds. That's the price you pay for better returns. Conservative, lower-return funds might be easier on your blood pressure, but you'll need to invest more to enjoy the same retirement.
Like the markets they invest in, funds go up and down. That's normal and shouldn't determine whether you sell. A more pertinent consideration is whether your fund is holding its own against its peers. For example, if your problem fund is invested in small-cap American companies on the NASDAQ, compare it against other small-cap NASDAQ funds. If your fund lags behind its peers for a year but is otherwise sound, it might not be worth selling. However, if it lags for two or three years in a row, you might consider getting out.
The Cost of Snap Decisions
Imagine for a moment that your mutual fund is an apple sapling. It'll take years to be really productive. If you get impatient and uproot your "underperforming" apple tree every two or three years, you'll probably never see a worthwhile crop. With mutual funds, the fees involved in shifting your money from one fund to another can sap your returns badly. Worse, you're running counter to the fundamental investment advice to "buy low and sell high." If you jump every time your funds go down, you're selling low and buying a different fund when it's high. That's a terribly destructive habit for an investor.
Fred Decker is a trained chef and certified food-safety trainer. Decker wrote for the Saint John, New Brunswick Telegraph-Journal, and has been published in Canada's Hospitality and Foodservice magazine. He's held positions selling computers, insurance and mutual funds, and was educated at Memorial University of Newfoundland and the Northern Alberta Institute of Technology.