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When to Buy and Sell Mutual Funds
Last Updated: April 22, 2016
The equity markets have been choppy over the last year and a half. Last year we had one of the worst Septembers to immediately be followed by one of the best Octobers. January 2016 started with a large cap pullback in the 5% range to have the markets rebound close to 6.5% in March. [1]
When these market upturns and downturns occur, clients and participants of retirement plans often ask why their portfolio return is different from the total return reflected on a mutual fund fact sheet. Before answering the question, a person first needs to understand the difference between total return and investor return within a mutual fund.
Total return in a mutual fund is the fund performance without investor cash in-flows and out-flows; it is the buy and hold performance of the fund.
Investor return reflects all cash in-flows and out–flows and shows how the average investor performed over time. [2]
There is often a difference between total return and investor return. The difference indicates how well the average investor timed their buys and sells. The main reason for the difference between the two returns is a direct result of investors chasing returns and then making ill-timed trades. In fact “Morningstar data shows that investors in diversified US stock funds have missed nearly 1.8% of the funds annualized total returns over the past decade because of bad trading.”[1] Besides pulling out your hair, what is an investor to do in these volatile times?Build a portfolio that properly reflects your risk tolerance
- Just because the stock market is rebounding, it doesn’t mean you need to buy more stock funds.
- Just because the market is going down, it doesn’t mean you need to sell your holdings.
- If your portfolio is properly diversified according to your risk tolerance, you will be able to take advantage of the upturns and be able to ride out the downturns.
Stop listening to the water cooler talk
- Just because your work buddy is talking about the next big crash, it doesn’t mean it’s actually going to happen.
- Just because your golf buddy is selling his portfolio, it doesn’t mean you need to sell.
- Stick with your investment plan and block out the noise.
Stop trying to time the market
- To be an effective market timer, you need to be right twice. An investor must not only be able to sell assets at the correct time, but must also be able to purchase assets at the correct time. This is extremely difficult to do.
- Multiple accurate decisions add yet another obstacle to effective market timing.
- There are times when the markets inefficiencies are more apparent. During these infrequent periods, timing a specific segment of the market may be beneficial if the decision is made with the help of a financial professional.
