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The Tip: Changing mutual funds should be a rare event. But if your fund has been underperforming for a while or if your portfolio is out of whack, a change might be in order.
When you begin investing in mutual funds for retirement, you’ll have thousands of funds to choose from. With such an overwhelming selection, it’s easy to convince yourself that you’ve missed out on a top performer. Or, as you become a more experienced investor, you may want to use your education to select more sophisticated funds.
Many mutual fund investors make that same mistake and hold on to their funds for only three or four years. That’s far less than the minimum 15–20 years most investing experts say it takes for a fund to ride out the stock market’s ups and downs and live up to its potential.
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Dave agrees that changing funds should be a rare event. He recommends you focus on choosing funds with a long history of above-average returns for their categories. Over the course of your investing career, however, you may encounter these two instances in which changing funds can be the right thing to do.
A History of Underperformance
While you should never make investing decisions based on one quarter of a mutual fund’s performance, a period of two years or more should get your attention. But make sure your judgment is based on the correct information.
The different types of funds you invest in respond to market trends in different ways. For example, your aggressive growth mutual funds could be hit hardest in a volatile market while your growth and income funds are more stable. The mix helps you take advantage of the stock market without taking on too much risk.
But this difference also means you should not compare the performance of funds from different categories. Your aggressive growth funds are designed to rise faster than your growth and income funds, but that doesn’t mean your growth and income funds are underperforming.
Even a fund that’s down can be a top performer, so talk with your financial advisor before you decide on any changes.
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A Balancing Act
Dave says your investments should be evenly distributed between four mutual fund categories: growth, growth and income, aggressive growth, and international. But, as your investments grow over time, your portfolio may become uneven with one category outweighing another.
To balance things out, you should sell some of your excess mutual funds in one category and use the money to buy more funds in the skimpier category. This is one more way you reduce your investing risk—by keeping your eggs divided equally among your four baskets.
Make the Right Choice With a Pro’s Advice
Any changes you make to your mutual funds should happen through a series of discussions with your financial advisor. And, since it usually costs money to change funds, make sure you understand the pros and cons before you take action.
Find a financial advisor you can trust to explain your mutual funds and help your investments stay on track over the long term through Dave’s Endorsed Local Provider (ELP) network. Find an expert Dave recommends in your area today!