Valerio Baselli: Hello and welcome to Morningstar. When is it better for me to sell? This is a question that all investors sooner or later ask themselves.
We have already listed the three worst reasons to sell a fund, and we wouldn’t be doing this subject justice if we didn’t also list good reasons to sell your investment.
That’s why I’m joined by Russel Kinnel, he’s director of ratings for Morningstar Research Services.
So, Russel, in some ways I feel that finding a good reason to sell is even harder than identifying a bad reason. I guess the answer is dependent on each individual, after all. But of course, I’m asking you: what is the first good reason to sell a fund, in your opinion?
Russel Kinnel: Well, the first reason is good news. You’ve reached your goal. You are saving money for your kid’s college tuition, a home, a car, or retirement. Obviously, retirement is something you gradually unwind, but in any case, you’ve reached your goal. Be happy that, you know, mutual funds and investing is a means to an end. It’s not about accumulated most or anything. It’s about getting that goal and then realizing it. So, just simply you reach your goal, so now cash in and go, go use that money.
Baselli: Absolutely. What is another good reason to sell?
Kinnel: Yeah, this one’s a broader topic. I would say fundamental changes to the fund. So, for instance, you bought the fund for small cap exposure, but because of assets, it’s moved up to Mid-caps. Or sometimes we see ETFs change their strategies completely. You could see things like rising fees. So, any kind of important fundamental change that it’s no longer serving the purpose that you bought the fund for. So, you know, maybe, maybe it’s, you know, time to sell.
Baselli: And the last one?
Kinnel: You know, if your thesis is broken, let’s say you thought you bought a bond fund. That’s very good at playing defense. So, it’s not going to make so much money in rallies. But it’s good to play good defense. Now, you’ve had interest rates spike, or a credit selloff and it does poorly. Now you’re looking at a fund that’s maybe strung together a number of poor performances, or you thought the fund would do a good job when tech stocks rally, and tech stocks rally and it hasn’t done well. So again, this is more of a long-term thing. It’s not just necessarily one bad stretch, but let’s say over a couple of periods it really doesn’t do what you thought it was going to do. And you think okay, maybe I was mistaken from the get-go and now it’s time to admit I made a mistake: that’s what good investors do. They realize that they’re not perfect, and they don’t hold onto an investment for dear life. They recognize: Okay, I made a mistake, let’s move on.
Baselli: That’s great. Thank you, Russel. For Morningstar, I’m Valerio Baselli, thanks for watching.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
