BOSTON (CBS) – The number one reason to sell is when your goals or objectives are met and you need the dollars to pay for the goal.
As you are getting closer to reaching your goals you should be thinking about changing the asset allocation of the investment.
For example, your son is a sophomore in high school, college is only 2½ years away. Any new contributions to the college savings should remain in cash and it’s a good idea to begin to shift some of the stock investments into cash over the next couple of years so you have at least the first and second year’s tuition available.
Another example, you are 55 and want to retire in 10 years or so. You are pretty much invested in stock mutual funds right now. All of your new retirement contributions should go into the bonds, cash equivalent, or the stable fund choices.
You will be diversifying your portfolio and in ten years you would have a balanced portfolio that would serve you well in retirement.
Another reason to sell your mutual fund is if it is under performing the benchmarks and its peers. You can cut it a little slack here. Compare those one-year, 3-year and 5-year performance numbers. If it doesn’t make it, you might want to cut it from the portfolio. But one poor year for a very good fund is not enough to sell in my mind.
Consider selling if there are legal problems with the mutual fund company or your particular mutual fund or the fund managers. The SEC is trying to protect investors and make them aware of problems but only you can pull your money out of those funds.
Morningstar reports will also help here by listing the manager’s education and experience in their next update on the fund. Also utilize the Mutual Fund Observer newsletter for research on funds. They don’t tell you when to buy mutual funds but when to sell a mutual fund.
One more thing: A bit of history. The last major recession was 1973-1974. If you had invested $1 million in the S&P 500 on January 2, 1973, one year later you would have $853,450, one year and 9 months later it would only be worth $573,780.
If you had pulled out of the market and put your money in a 5% CD in 10 years you would have $934,627. Almost fully recovered.
But if you had not touched the investment you would have recovered in two years and in 10 years you would have had $2.4 million.