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When to sell a fund
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April 25, 2000: 5:51 a.m. ET
Holding long term is advisable, but sometimes re-allocating money is smart
By Staff Writer Jeanne Sahadi
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NEW YORK (CNNfn) - No matter how committed you are to long-term investing, there comes a time -- or maybe a few times -- to let a mutual fund go.
Knowing when and why a fund isn't working for you and selling it at the right time can recharge your portfolio -- and sometimes save you money.
Loss can be your friend
Since you're invested to make a profit, the notion of taking a loss probably doesn't sit well with you. You're not alone. "Investors have a hard time doing that," said Atlanta-based certified financial planner (CFP) Bill Kring.
But, Kring said, if one of your taxable funds -- meaning one outside a tax-deferred retirement plan -- is doing poorly, "it can make a lot of sense to realize a loss."
 Say a technology fund in which you put $10,000 has been bottom-feeding for a while and your balance is now worth $7,000. Whine if you want. But you'd be a lot happier if you sold the fund and deducted the $3,000 loss from your taxable income. That way, Kring said, "You're letting the IRS bail you out."
Then you should reinvest the $7,000 in a comparable tech fund since the goal is to take advantage of the loss, not get out of the sector. The law prohibits you from buying back into the original fund for 30 days if you want to realize the loss.
Taking a loss can also offset dollar for dollar any capital gains tax you must pay on the sale of a top-performing fund. So if you have earned $5,000 on one fund and have a $5,000 loss on another, you won't owe the IRS anything.
And if you've got more loss than gain, carry the difference and apply it to your taxes in the next year, advised CFP Scott Leonard of El Segundo, Calif. "We realize losses whenever we can," he said.
Diversity's a chum, too
Diversity -- or rather a lack of it -- is another good reason to change your funds.
Even if you think your holdings are diversified, look again. Regardless of investment styles, a lot of funds are chasing the same stocks, Kring said, which is why it's a good idea to keep an eye on your funds' top holdings.
 There may also have been some standout performances in some sectors, which means your funds in those sectors may account for too large a percentage of your portfolio.
"Re-allocate if you have too much in one area," Kring said.
But if you're rebalancing your portfolio, experts advise you do the majority of your fund shuffling in your 401(k) or IRA to avoid paying taxes.
"You should try to be more sticky with your taxable assets," said CFP Eric Kendrick of Austin, Texas.
Are your funds too much in sync?
Leonard also recommends periodically checking the performances of your funds relative to each other. Are they moving in tandem in an up and a down market? If so, regardless of asset class, they're not offering you enough diversification in performance, which is great in a bull market but troublesome when the bears reclaim turf.
"You've got to find the 10 percent of funds that aren't doing the same thing," he said. "You want asset classes that move differently."
Take the market's downhill ride in recent weeks. "If all your funds went down together, you're not getting the diversification you think you are," Leonard said.
Stick to your investment policy
You also want to know that the funds you chose for their asset class are acting true to form. That large-cap value fund you own may be performing an awful lot like a large-cap growth fund. That's not necessarily a reason to sell, Leonard said, but it's an invitation to review the taxes and expenses on the fund. Does it have a lot of turnover? Would you be better off in a real growth fund for the money? Or should you look for a true value fund to preserve the integrity of your investment goals?
Check your mutual fund
And those goals -- or what Leonard calls your investment policy -- should underlie any fund decision you make. Know why you own a fund in the first place and be aware that any lifestyle changes you make will alter your investment needs.
So if your first goal is a down payment for a house, Leonard advises staying away from stock funds. But when the house is bought, and you want to start investing for your child's education, your money might be better served in a different kind of vehicle.
Review the manager's record
A change in portfolio managers may be cause for concern, especially if the incoming manager's track record is not as strong as you -- or your financial adviser -- thinks it should be.
You also should scrutinize your reasons for holding a fund if a star manager leaves, Kendrick said. If you invested for that person's reputation and strong performance, you should reassess which funds would work best for you after the original manager leaves.
When not to sell
If your fund is giving a below-par performance relative to its peers in a given quarter or year you may think that justifies packing up your dollars. Not necessarily, Kendrick said.
"Everyone should expect a certain amount of reward," he noted. But presuming the fund is reputable and its investment style is right for your portfolio, he believes investors should plan to stick with it up to three years and learn about the portfolio manager's investment philosophy before beating a retreat. Maybe the manager swears off those dot.coms that show no signs of turning a profit, a position that could bolster your fund's performance in a down market.
But protecting yourself from the bears isn't the only reason not to treat funds as short-term investment vehicles.
Expense becomes a big factor when you fund-hop, especially if you're moving in and out of taxable funds. Any gains made on the sale of a taxable fund held less than a year will be taxed as ordinary income, which is usually a higher rate than the 20 percent charged on long-term capital gains.
And unless you're in a mood to give your money away, moving in and out of funds with high loads or expense ratios can sap many of the gains you thought you made. 
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