When Should You Drop A Mutual Fund?

from daveramsey.com on 25 Jun 2010

When should you dump a fund that is underperforming?

First, remember that investing is all about the long-term. If you can’t afford to let this money sit at least five years, then you’re not ready to invest.

When one of your funds has a bad quarter, don’t freak out and immediately find another fund to replace it. But, if a mutual fund has consistently performed poorly, then consider a few things. Here’s how Dave makes the decision about whether or not to drop a fund.

Ask for the advice of your investment advisor.

A good advisor will help you decide whether to keep the fund or look for something new. That’s what you’re paying him for! But don’t let the advisor make the decision for you. Stay involved in the process. A good advisor will also help you with the next two steps.

Compare the fund’s track record with similar funds.

For instance, assume you own a growth stock mutual fund that’s lost 12% over the last year. The first thing you should do is compare your fund to other growth stock mutual funds. Are the other growth stock funds performing poorly? If so, that just means the funds, in general, are performing badly in the market. Hold on to your fund because it should increase in value again.

Determine how long the fund has been underperforming.

If a mutual fund has been struggling for a long period of time, then talk to your trusted investment advisor. There’s no right answer on when to dump a fund. But if your fund has performed well, in comparison to similar funds, over a two-decade period, give it at least two or three years to catch back up.

It usually costs money to change funds. So get with your advisor and do your research before dumping your fund.

Remember, the tortoise wins the race every time. Don’t panic and dump a fund just because it’s been underperforming over a short period. Be patient. Contact your investment advisor, compare similar funds, and give your fund time to recover before you drop it.

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