And now comes the hard part: When to sell that mutual fund

March 22, 1992|By Thomas Watterson | Thomas Watterson,Boston Globe

An awful lot is written about when to buy mutual funds, which funds to buy, which funds not to buy, or the best time to buy a certain fund.

Doesn't anybody need to know when to sell?

Not very often, it seems. Asked to suggest some tips to help investors know when its to sell a fund, some advisers didn't have a quick answer.

"It's a very complicated and confusing subject," said Sheldon Jacobs, editor of the No-Load Fund Investor, a newsletter in Hastings-on-Hudson, N.Y.

"Let me think about that," said Donald Wertheimer, a financial planner in Mount Shasta, Calif. After some thought: "I'd recommend that people not put all their eggs in one mutual fund basket." That is a good answer -- to a different question.

Many investors find it easier to make a buying decision than a selling decision and, as a result, they often have a large collection of funds with similar or conflicting objectives, and separate management fees for each one.

Also, if they buy a fund from a broker or commission-based financial adviser, they pay a load, or sales charge, on every fund they buy.

Occasionally, then, the fund portfolio should be examined to determine whether there are any candidates for redemption. Although there are some things to look for, there is no best way; like the decision to buy, the decision to sell is based on a mixture of fact and intuition.

Some advisers, for example, compare a fund to a major market index, such as the Standard & Poor's 500. "If a growth fund has underperformed the S&P for 18 months or so, it's time to bail out," said Jack Bowers, editor of Fidelity Monitor, a Rocklin, Calif., newsletter that follows Fidelity funds. "Most growth and growth-and-income funds worth having will beat the S&P over an 18-month period."

Mr. Jacobs disagrees. "You should judge a fund only in relation to its peers, not in relation to an index," he argues.

If you're in an aggressive growth fund, or a balanced fund, you should compare yours to its peers in those categories. Then, "If a fund ranks near the bottom of its objective for a year or two, you ought to be thinking about selling," Mr. Jacobs says.

For example, one of the worst-performing funds in recent years has been the Bull & Bear Capital Growth fund. For the last 10 years its total return has been the poorest of all growth funds. But investors who did some research would have seen it coming. Morningstar Mutual Funds, which evaluates fund performance, much as Value Line follows corporate stocks, shows that in 1979, Bull & Bear's performance placed it in the fourth percentile, making it among the best-performing funds for its objective, because it did better than 96 percent of all growth funds.

In 1980, however, it slipped to the 15th percentile. In 1981, it plunged to the 91st percentile, and it was in the 90th percentile in 1982. Except for 1989, when it made it up to the 33rd percentile, Bull & Bear spent most the 1980s in the bottom third of its category. Savvy investors who were following those numbers would have gotten out no later than 1982.

Sometimes, a fund can be a victim of its investment goals, not bad management. "It's hard to tell whether a fund is having a bad year or it's just part of the cycle for the type of investments it's in," Mr. Wertheimer says.

Until early last year, for example, large-company stocks -- and the mutual funds that buy them -- were outperforming small-company funds and stocks. So investors in small-company funds may have been tempted to sell. However, they should have compared their funds with other small-company funds, and if it was leading that pack, stayed with it and added more money.

In some cases, a decision to sell should be accompanied by a decision to buy, to avoid building up an unwieldy and expensive portfolio of funds, Mr. Wertheimer says. Investors are being exposed to new funds or reading about top-performing funds all the time, and some of the funds are worth buying, he notes.

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