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April 23, 2000
You're not thinking of selling your mutual fund now when the stock market is performing poorly, are you? Don't even think about pushing the "sell" button on your screen. Consider these 3 points about staying invested in your mutual funds during the wild swings of the stock market:
- Mutual funds are widely diversified.
- Market timing in mutual funds is not recommended.
- Mutual funds are long term investments.
Mutual funds are widely diversified.
The diversification offered by mutual funds is one of the top reasons to invest in this type of financial vehicle. Mutual funds have many stocks in their portfolio of investments and all these stocks perform differently at different times. Some will be up, some will be down and some will be up more and some will be down more. What this means is that mutual funds will probably absorb unstable market conditions better than investing directly into stocks.
Market timing in mutual funds is not recommended.
Many studies have shown that investors who have stayed invested during the roughest times of the market have experienced the greatest growth when the markets turned around. These same studies have also shown that mutual fund investors aren't able to time the market well enough to produce any improvement in their overall portfolio. In fact, by selling and trying to time the stock market when you are invested in mutual funds, you are likely to decrease your overall return because you will probably miss some of the early run up while trying to decide if the time is right for you to reenter.
Market timing is more for the stock investor and not for the mutual fund investor. You are paying the mutual fund managers, the professionals, to determine when to enter or exit certain positions. Don't try to second-guess them.
Mutual funds are long term investments.
When the markets turn excessively rough, mutual fund investors should take comfort in knowing that they are invested for the long term. Many mutual fund managers create positions in stocks that they plan to hold for years and they continue to add to these positions over the long term. In fact, many times after a market bottom, mutual fund managers are buying and adding to their long-term positions at the new lower prices. This type of investing will create significantly greater returns for those savvy investors who stayed invested and didn't sell their shares at the first sign of market trouble.
So when would you consider selling your mutual fund shares? If any of these three things occur: your investment strategy has changed, the fund's overall investment philosophy has changed or the fund manager has changed.
Remember one of the secrets to successful mutual fund investing is holding for the long-term. Stick to your sound investment strategies and don't let the market gyrations scare you out.
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