Examining the yields of a mutual funds or ETFs and selling the ones generating weak returns goes without saying, but knowing when to part with the other ones can be tougher.
Investors need to avoid extolling the original virtues of a fund and consider its current attributes instead, said Paul Jacobs, chief investment officer of wealth manager Palisades Hudson Financial Group, a Scarsdale, N.Y.-based financial planning firm with $1.2 billion under management.
“Ask yourself if you'd buy the fund again today if you were starting over,” he said. “If for any reason the answer is no, then it may make sense to sell. A portfolio is no place to get sentimental.”
These are the top six reasons to move on from a fund or ETF:
The recent selloffs in the market might prompt more investors to sell their funds, because their “unrealized gains are lower or may have turned into unrealized losses,” Jacobs said. This also makes sense if you sold a winner this year also.
“Even if your fund has been performing well relative to the competition, it’s always feels better to sell knowing that you'll get a tax benefit instead of having to take a tax hit,” he said.
Selling a fund only because the sector is “out of favor” or the market has declined can be a drawback, said Jon Ulin, a managing principal of Ulin & Co. Wealth Management in Boca Raton, Fla.
“Don’t let your tax tail ‘wag the dog’ of your long term investment strategy,” he said. “In some cases, an out of favor investment may be your best weapon or market hedge when the tide turns.”
The current market volatility could produce unintended consequences, said Edison Byzyka, vice president of investments for Hefty Wealth Partners in Auburn, Ind.
“This may likely be a smart move but beware of drastic market moves to the upside that can hurt performance,” he said. “At the end of the day, this may another form of market timing.”