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  Thursday October 30th, 2014    

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The Alchemist: When to sell a fund (11/29/2006)
By Al Thomas
Very few brokers will ever call to tell an investor it is time to sell a mutual fund or Exchange Traded Fund. One of the basic reasons is he told his client it was a great fund and now that it is doing poorly it would make him look bad to say "get out".

Brokers have not been taught that a small loss is much better than a big loss. It is better to be embarrassed than let a client lose a big chunk of his equity.

If the investor had been smart in the beginning he would have chosen a no load fund. That's one with no commission. Why would any person want to start 5 to 8% in the hole when hundreds of no load funds outperform the load funds? They fell for brokers' lies.

There are a few services that do advise selling, but most I have reviewed wait until the loss is severe before pulling the plug. The investor should not have to sustain a 20% loss to be told to sell. Five to 8% is more than sufficient. The patient can live with having a finger amputated rather than wait for gangrene to set in and have the arm removed.

Most brokers will look at 3, 5 and even 10 year performance records to determine if a fund is good or not so good. They compare its performance against the S&P500 Index. This is pure nonsense. During any 10 year period the S&P will have had periods of 20 to 40% losses. That is not why a person buys a fund. Don't fall for that one.

There are times when the best position is in an interest bearing money market fund even if it is paying less than 1%. If a fund is following the S&P and it is headed into the tank with your money attached it is time to bail. Money under the mattress at no interest is better than riding a fund down 40% or more. Get out.

When a fund is dropping or not going up even when the S&P is rising the investor might call his broker to ask why. He will get the stupid answer, "It is just a temporary period. The manager has an excellent 10-year track record. Hang it there. It will come back" And pigs can fly. It is not his money.

Beating the S&P is about as dumb a benchmark as there is, but it has been told so many times it has become conventional wisdom. In a recent study by Litman/Gregory Research they found that of 266 funds nearly all underperformed their benchmark index for 36 months during a 10 year period. They don't mention if they made it back to the old high prices. Many did not.

It might not be a bad idea to compare what a fund has done for the past 5 and 10 years to the return of a plain bank CD. At least you know you will get all your money back.

Al Thomas' book. "If It Doesn't Go Up, Don't Buy It!" has helped thousands of investors make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he is the man that Wall Street does not want you to know. Copyright 2006 All rights reserved. 

 

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