When to buy, sell or hold
- By Milt x_Zall
- May 12, 2000
Buy and hold. That's the advice investment professionals offer long-term
investors. And it makes a lot of sense if your investments continue to perform
as expected. But what if they don't?
Stocks (and mutual funds that own stocks) fluctuate in value when a
particular market sector, say drug companies or retailers, temporarily falls
out of favor with investors. Investors move their money into high-flying
sectors, and the prices decline for the out-of-favor stocks that are no
longer in demand.
Don't confuse price fluctuation with under-performance. No mutual fund
appreciates without pausing. Selling your mutual fund shares when its price
drops is a mistake.
For long-term investors, the normal "rotation" from one sector to another
should count for very little. As long as nothing alters the fundamental
outlook for your investment, don't sell because of temporary shifts in demand.
Having said that, there is no excuse for falling asleep at the wheel.
Many factors may alter a mutual fund's fundamental attractiveness. What
may have looked like a great investment five years ago may now appear unattractive.
Economic conditions change. Mutual fund managers change. Competitive forces
can alter the fundamental outlook for a company or industry. Because of
the dynamics of our economy, mutual fund managers must constantly evaluate
the performance of every company in their portfolio and be prepared to act
swiftly and decisively if a company's profit outlook changes.
But what if the manager drops the ball?
If you want satisfactory investment results, you must periodically evaluate
the performance of your portfolio to ensure that your investments are performing
as planned. At times, a decline in the value of a mutual fund's shares may
portend further declines.
Here are some warning signs you should look for:
* A mutual fund underperforms its peers for one to two years. If that
happens, call the investor relations department and ask why. If you don't
get a satisfactory answer, the fund may be a candidate for sale.
* Your asset allocation formula has become unbalanced. If you have decided
upon a particular mix for your investment portfolio, say 60 percent in equities,
30 percent in bonds and 10 percent in cash, you should periodically check
and adjust the asset allocation within your portfolio. If the equity portion
has appreciated and now represents 70 percent of your portfolio, liquidate
some of your equity holdings and reallocate the proceeds.
* Your personal needs change. A major event in your life, e.g., a child's
wedding or the need to finance a college education, may require you to raise
cash by selling some portion of your portfolio.
* There are excessive mutual fund expenses. If your mutual fund incurs
excessive expenses, for example, more than 1.5 percent, and the fund is
not outperforming its peers, look for a comparable fund with lower expenses
and better performance.
* There is a large increase in a mutual fund's assets. The smaller a
fund is, the easier it is for the manager to move nimbly. As a fund grows
in size, the manager's job becomes harder. Case in point: Fidelity Magellan.
This fund has become so large that it is virtually impossible for the fund
manager to outperform the market because the fund is the market.
* A "small-company" fund (funds that invest only in companies whose
market capitalization is less than $1 billion) gets too big. Once a small-company
fund has more than $500 million in assets, look for a similar fund with
* You have tax considerations. Losses or gains in your other investments
may necessitate offsetting losses/gains to minimize taxes. But before acting,
talk to your tax adviser.
* Your portfolio is too large. For most investors, owning five or six
mutual funds is more than enough diversification. Prune the size of your
portfolio if it exceeds this amount.
Zall, Bureaucratus columnist and a retired federal employee, is a
freelance writer based in Silver Spring, Md. He specializes in taxes, investing,
business and government workplace issues. He is a certified internal auditor
and a registered investment adviser.