1) Your fund is a persistent loser
The mere fact that a fund has low returns or even losses isn't a
good reason to sell. If the overall market is down, or the
specific sector your fund invests in is out of favor, you can't
expect your fund manager to be a miracle worker. But if you own a
fund that trails similar funds for two years by a substantial
margin -- say, two percentage points or more -- then I'd unload it.
2) The fund's investment strategy has changed
If you've attempted to create a diversified portfolio, then
you're probably counting on the managers of all your funds to
invest a certain way. The small-cap fund manager should be
sticking to small-cap stocks, and the large-cap value fund
manager should be buying large-cap value stocks. If they stray,
it puts your entire plan into jeopardy.
3) There's been a manager change
In today's fund world, many managers job-hop as often as NBA
coaches. Anytime your fund gets a new skipper, you should closely
monitor the situation to assure two things: first, that the new
manager is following the same investing style and strategy as his
predecessor; second, that performance hasn't suffered. I'd give a
new manager one year (and no more than two) to prove himself.
4) You could use the tax loss
There are times when you might be able to lower your tax bill by
dumping a losing fund yet still pretty much maintain your asset
mix. For example, say you own shares in a large-cap growth fund
that are worth less than you paid for them. If you sell, you can
use the loss to offset gains in other securities. Then, you can
turn right around and buy another large-cap growth fund. Or, you
can buy back the very same fund after 31 days, as allowed by the
IRS "wash-sale" rule.
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