When to Sell a Bond Fund
For all of the press on the best bond funds to buy, much less attention is given to the issue of when to sell a bond fund. This decision can be just as important, since it may save you from incurring losses in the portion of your portfolio that’s designed to provide an element of safety. With that in mind, here are five reasons why you should consider selling your bond fund.
This is the most obvious, but it’s amazing how long people will stick with a poorly performing fund. Some of the worst-performing funds still have several hundred millions of dollars in assets invested by shareholders who are, sadly, sticking it out.
This is unfortunate since there are so many alternatives among both mutual funds and exchange-traded funds (ETFs). Keep an eye on how your fund performs against its benchmark (the index it tracks) and the funds in its peer group. If a fund's return has lagged consistently over a long-term period of three or more years, it's time to sell and move on.
This one is more counterintuitive. Why consider selling a bond fund that’s delivering outstanding returns? The reason is that it may be taking on too much risk, or it may be concentrated in a single asset class that could be vulnerable to a correction after performing well for an extended period of time.
While the manager may adjust the portfolio by selling the winners and reinvesting elsewhere, substantial outperformance is a sign that you should take a closer look at the fund to find out exactly how it’s generating its big numbers.
When Your Objectives Change
Certain asset classes carry higher risk and are therefore appropriate only for longer-term time frames. For example, high yield bonds would be appropriate in a college savings account if you don’t need the money for another ten years.
However, once you reach the point where college is, for example, only a year or two away, high-yield bonds are too risky for such a short-term objective. In short, there’s nothing wrong with selling a bond fund when it is no longer suitable for your goals.
A Similar Fund or ETF Has Lower Fees
Would you pay $5 for a gallon of milk when the store next door is selling it for $3.50? Of course not. But people will still pay higher fees for funds that often have alternatives that are essentially the same but much cheaper. Over time, this can add up. The issue of cost is particularly important when it comes to index funds. Take the time to see how much your fund is charging you and, if you can do better, consider making the change.
The Fund’s Strategy Changes
There are many reasons why a fund’s strategy would change: A new manager, shifts in the fund company’s lineup, and sometimes the addition of a new strategy to an existing fund (often accompanied by words such as “Enhanced” or “Plus” suddenly appearing in the fund’s name).
When this occurs, the fund may no longer provide the type of risk-and-return profile that you have come to expect, and its record of past performance becomes even less of an indication of future results than it would be typically. Once a fund’s strategy changes, make sure you put it on a short leash and keep a careful eye on performance results that may be different from what you’ve witnessed in the past.
One final thought: Before you sell a fund, take tax considerations into account. If you hold a fund in a taxable account, you will be liable for any capital gains that have been accrued. While this isn’t as much of a concern with bond funds as it is with stock funds, make sure you look into your potential tax liability before you make any investment decision.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be construed as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities. Always talk to a financial advisor and tax professional before you invest.