There are many good reasons why some investors stick to their mutual funds through thick and thin. However, for every good reason to stick to an underperforming fund, there is an equally good reason to finally ditch it.
You Need to Rebalance Your Portfolio
Given a long enough timeline, the trends in the financial markets can cause your asset allocation to veer away from your desired allocation.
That means your fund will likely grow to a large proportion of your portfolio. Such a phenomenon exposes you to different levels of risks.
To avoid this, you need to rebalance your portfolio on a regular basis. You do that by selling some units of the fund that have large weights. You can then transfer the units of the fund that have relatively small weights.
Fund Changes or Mismanagement
Many changes can happen to a mutual fund. Such changes can go against your style and preferences.
For example, an excellent fund manager may have to leave and he or she will be replaced by someone who isn’t as competent as the original manager. Other times, the manager doesn’t leave, but he or she changes his or her management style, which may not meet your expectations and preferences.
Growth in Investor
There is such a thing as growing out of your mutual fund. As you gain knowledge and become a better investor, you may realize that the fund is no longer for you.
For instance, you gain great wealth, which means you have the firepower to buy enough individual stocks. You will be able to achieve better diversification.
Changes in the Life Cycle of the Fund
Even if stocks rank as the top investments to have for the longer term, the volatility they have usually makes them a shaky investment for the shorter term.
When you are faced with some financial responsibilities like retirement, college, or some other funding deadlines, you typically have to shift to funds that aren’t investing in stocks like bond funds, which have maturities that may coincide with the time that they will be needed.
You’ve made a Mistake
Investors commit mistakes, and sometimes what they need to do to fix that mistake is to leave and ditch it.
There are instances when you realize that the fund you have bought isn’t what you really want. For example, you buy a mutual fund because you think it’s pretty good on paper. However, when the real trading happens, you discover that’s too volatile for your investing taste and risk tolerance.
You Find Something Better
Even in real-world decisions, you have to let go of the current thing to give way to something even better. For instance, even if you love your job right now, your financial needs and the professional growth you want lie in the arms of another boss and company.
In the world of mutual funds, some excellent funds can appear with innovations that are better at achieving your desired targets.