Three Poor Justifications for Selling Your Fund

Valerio Baselli: Hello and welcome to Morningstar. Markets go up and down, and sometimes short-term volatility is extreme. We saw that for example with the outbreak of the pandemic in March 2020, two years later with the Russian invasion of Ukraine, or even more recently.

Whether our investments are doing great or losing much more than expected, it’s never easy to know when it’s the right time to sell.

Today I’m joined by Russel Kinnel, Director of Ratings for Morningstar Research Services.

Russel, people often ask: when is the right time to buy, to enter the market? Less frequently we discuss the topic of when is the best time to sell. That’s why today with your help we are going to list three bad reasons to sell a fund. Let’s get started: what is the first one?

Russel Kinnel: The first one is short-term performance reasons. This is sort of the classic novice investor mistake. So, the market’s up 20%, and you’ve got a fund that’s only up 10%, or the market’s down 5% and your funds down 10%, something like that. And you’re unhappy, but the catch is short-term performance is largely noise. Even the best investors, will have periods where they underperform.

Typically, funds have sector bias. Maybe a style bias. That means sometimes they’ll be particularly in favor or sometimes they’ll be out of favor. It’s long-term performance. It tells us something about manager skill. So, one of the classic mistakes is selling because of short-term performance. And often that comes back to bite the investor very quickly because the reasons that underperformed now go in favor and the fund quickly rebounds. So that’s kind of a classic early investor mistake.

Baselli: That’s very true. What is the second bad reason to sell a mutual fund?

Kinnel: I think sometimes we make macroeconomic calls, and we don’t really understand what we’re doing. So, there’s problems with macro calls, and one is simply that the markets are very efficient. So, if you read something about Germany’s new budget or U.S. Federal Reserve changes, that gets priced in very quickly. So, you may be reacting to it even that day, but it’s still priced in really quickly. And so, it’s hard to have an advantage. And on top of that, even when you know those things, it’s hard to really predict where the market’s going to go because of that. So, it’s much better to focus on your plans, stick to your plan and be patient rather than trying to make a lot of short-term macroeconomic calls.

Baselli: Absolutely. And finally, what is the reason number 3?

Kinnel: This one’s a little more nuanced. And I’ll put it this way: sometimes people will sell a bond fund because they want more income. They’ve got a fund that’s got a good total return, let’s say it’s yielding 3%, but you want 5% for your goals. But the catch is really you need to focus on total return, because, of course, if the fund’s got a good return with a 3% yield, you can just withdraw that additional 2% and be very happy, whereas sometimes higher yielding funds will have poor returns because their net asset value is eroding, so, maybe they’ve got a 5% yield, but their total return is only 2%. So, really don’t focus so much on income as much as total return, because there are different ways to get income, including, selling off some of the shares of your fund. So, pushing too hard for income can be a mistake.

Baselli: Very clear and very useful. Thank you so much for your time, Russel. For Morningstar, I’m Valerio Baselli, thanks for watching.

Click here to watch the video 3 Good Reasons to Sell Your Fund

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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