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Managing wealth with professional strategies
The Buy and Sell Decision The buy and sell decision in mutual funds is a complicated decision. The impulsive jumping in and out of your funds is not a sensible approach, but neither should you assume you can simply hold for a lifetime. Professor Albert J. Fredman from California State University, Fullerton co-authored (with Russ Wiles) the book " How Mutual Funds Work". The following is a checklist to help you determine whether to sell or hold a mutual fund. These questions are often interrelated and must be carefully weighed. You should also check with your investment professional for more detailed information concerning your funds and possible replacements. Fund-Specific Questions 1. How has my fund performed relative to an appropriate benchmark and its peers over the past one, three and five years? The more serious the underperfomance, the greater the incentive to sell. Alternatively, if the underperformance has not been too serious but has been getting worse recently, consider questions 2, 3, 4, 5, and 6. 2. Has there been a change in management? If so, when? This is not always a problem, but be concerned if a star manager leaves or there has been high management turnover. 3. Have expenses risen significantly? Higher expenses reduce returns, particularly for bond and money market funds. 4. Have assets increased or decreased substantially? A surge in assets could have an unfavorable impact on the performance of a small-stock fund if it becomes too large to function effectively. Conversely, ongoing redemptions spell trouble for any fund. 5. Has there been a strategy change? This may or may not be a problem, but consider selling if a fund adopts a new strategy that does not fit with your objectives. Personal Questions 6. Given my personal situation and knowledge of this fund today, would I buy it? Inappropriate funds should be sold. For example, eliminate an asset class that's no longer suitable for your portfolio. 7. Do I own too many funds? Sell less desirable holdings in a cluttered portfolio to simplify your task going forward. Applying questions 1 through 6 to each fund will help you decide which ones to weed out. 8. Do I need to rebalance my portfolio? To eliminate risk creep, pare back exposure to one or more asset classes that have become overweighted in an aging bull market. 9. Would selling result in a substantial taxable gain? Selling can be a tough call in this case and requires further analysis (particularly of questions 1, 6, and 8) before jumping ship. 10. Could I realize a significant loss that would offset gains and reduce my tax bill? This is a good reason to sell. If you still want exposure to the asset class, you could switch immediately to a similar fund or buy the same one back after waiting more than 31 days to avoid the wash-sale rule. Solutions for Wealth Management, LLC
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