Rethinking your Mutual Fund Investment

By Catherine Brock

Knowing when to sell a mutual fund position is as important as knowing when to buy one.

Many lounge singers have serenaded you with the fact that breaking up is hard to do. But that's no reason to hang on to a mutual fund longer than you should. The only trouble is, how do you know when enough is enough?

Do you remember the days when practically everything in the stock market seemed inevitably to go up? You could almost throw a dart at a list of mutual funds to make your winning picks. And, if you owned a position that didn't produce, you could just sell it and buy something else that did.

Now, when so many investments are in the red, you can't just automatically dump the mutual funds that aren't producing. That strategy would leave you holding bear funds and cash-and that's no way to grow your savings over the long haul. A better idea is to re-evaluate your funds in relative terms: Are they still a good fit for your Risk-tolerance">risk tolerance and investment timeline? Are they performing in line with their peers?

Know your investment risk

It's pretty common for an investor to overestimate his own appetite for risk. Generally, the mistake isn't revealed until a brutal bear market appears and ravages that individual's invested savings. If this stock market cycle has prompted you to rethink your risk parameters, you need to rethink your mutual funds, as well. If you don't have the stomach for the small cap tech fund or the emerging markets fund anymore, it's perfectly acceptable to sell them and move on.

Older and wiser

During the last 12 months, many investors have been waiting, hoping to ride out the market downturn. If the wait has moved you within five years of needing to tap that invested savings, however, it's time to consider overhauling your investment strategy. Granted, it's tough to get conservative at a time when your portfolio balance is in the tank, but sometimes that's the way it goes. Talk to your financial advisor about switching out some of your equity mutual funds for fixed-income investments such as high-grade bonds.

Rogues and bad apples

Just as there are mutual funds that performed relatively well last year, there are also some that performed relatively poorly. According to Morningstar, the Legg Mason Opportunity Trust was one of the worst mutual funds of 2008; it lost a shocking 65.5 percent. If you own a fund that radically underperformed its peers, it's probably time to break the ties. The fund manager may recover this year, but the fund itself will face an uphill battle: regaining lost ground while trying to cover rising redemptions as investors move elsewhere.

Finally, remember that when the market comes back, you'll want to be prepared with the right positions in your portfolio. If that requires a few break-ups and some realized losses, so be it.