No one wants to see their mutual fund perform poorly. But when your investment doesn't live up to your expectations, should you succumb to the temptation to sell off your shares and cut your losses as soon as possible? Or, is it better to batten down the hatches and stay stubbornly dedicated to a fund that you've thrown your valuable time researching and hard-earned money into? It's not at all unusual for everyday investors to second-guess themselves about hanging on to their mutual funds longer or selling at the first sign of trouble.
Experts say that investors make bad fund decisions based primarily on emotional reasons. No one likes to admit that after hours of research and possibly thousands of dollars lost, that a mistake has been made. Plus, money managers are always saying that mutual funds are meant for the long-term and to not let the interim ups and downs of the market shake your confidence. So, with just these two things combined, it must mean that you should never sell off your mutual fund, right?
No, actually, this never-sell mindset is all wrong. Before making your initial investment in a mutual fund, you need to specifically take pen to paper and write out your objectives for the investing in this particular fund. When the fund can no longer meet the criteria, you should cut your losses and move onto the next investment. Now, this doesn't mean that you should be a fair-weather investor, only satisfied when things are looking up and skies are blue. Often, your mutual fund will take a hit, but this doesn't necessarily mean that you make an immediate divorce from it. Instead, you monitor your fund over the course of a self-set, pre-defined period, never just a quarter or a single year but perhaps several, to see if performance is turning around.
Nearly every fund is going to have a down year and it's inevitable to always stay on top when the market environment or fund management changes dramatically. But resist the temptation to bail out and sell low - you'll just end up buying high later and that's not a wise or profitable cycle to get caught up in. However, if the years march on and your fund is still tanking or the fund managers have decided to switch up their investing philosophy, it may be completely reasonable to sell your shares and make another investment that better addresses the long term goals of your portfolio.
Todd Denning
Lean Investor
Strategy, suggestions, and solid advice for today's no-nonsense investor
http://www.leaninvestor.com/
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