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By Jason Stipp and Christine Benz | 01-28-2015 11:00 AM

3 Good Reasons to Sell a Fund

Persistent performance problems across market cycles, management or strategy changes, or your own personal situation may necessitate a sale, says Morningstar's Christine Benz.

Note: This video is part of Morningstar's January 2015 5-Point Retirement Portfolio Checkup special report.

Jason Stipp: I'm Jason Stipp for Morningstar. Morningstar data shows that fund investors often mistime their purchases and sales of mutual funds, but there are good reasons to sell a fund. Here to offer some tips is Morningstar's director of personal finance, Christine Benz.

Christine, thanks for joining me.

Christine Benz: Jason, it's great to be here.

Stipp: This week, we are talking about doing a portfolio checkup. A lot of our users are doing those in January, and you might find some funds that you think aren't doing what they should be doing. You might be considering a sale of that fund. Do you have some tips, though, to help really put that into the right context?

I think the first thing that folks will look at and wonder about a fund is performance. It looks like the fund underperformed. When is performance a good reason to sell a fund?

Benz: Well, I think if you are evaluating performance, you want to make sure that you are viewing it through the right lens. So, certainly, don't compare every fund in your portfolio to your best-performing holding. You need to make sure that you have the right benchmark to evaluate it. This can be either the fund's category peers--and, of course, Morningstar places funds in specific categories--or maybe better yet, an inexpensive index fund or exchange-traded fund. And that tends to be a somewhat higher hurdle in many categories, just a good core-type index product that's in that same category.

So, compare your performance, and you want to focus on performance over a full market cycle. Don't just focus on this period from 2009-14 where we've had relatively strong performance. Take a look back to a period that encompasses more volatile times. You want to look at how your fund held up in 2008 and consider that. So, consider volatility, certainly, as a part of your evaluation as well as its returns over a given period. You can look at standard deviation to gauge volatility. You can find a fund's volatility relative to its category peers, relative to an index. That's information that we provide on Morningstar.com. Or you can do a gut check: Look at performance, look back to 2008, look back to 2011--not quite as bad a year, but also a volatile year--to see how it did in those two years as well.

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