Once you own a fund, how can you tell when it's time to sell? The standard advice is to ditch a fund if it underperforms the market (or similar portfolios) for one-or is it two?-or is it three?-years in a row.
But this advice makes no sense. From its birth in 1970 through 1999, the Sequoia Fund underperformed the S & P 500 index in 12 out of its 29 years-or more than 41% of the time. Yet Sequoia gained more than 12,500% over that period, versus 4,900 % for the index.
The performance of most funds falters simply because the type of stocks they prefer temporarily goes out of favor. If you hired a manager to invest in a particular way, why fire him for doing what he promised?
By selling when a style of investing is out of fashion, you not only lock in loss but lock yourself out of the all-but-inevitable recovery.
One study showed that mutual-fund investors underperformed their own funds by 4.7 percentage points annually from 1998 through 2001 - simply by buying high and selling low.
So when should you sell? Here a few definite red flags:
As the investment consultant Charles Ellis puts it, "if you're not prepared to stay married, you shouldn't get married." Fund investing is no different. If you're not prepared to stick with a fund through at least three lean years, you shouldn't buy it in the first place. Patience is the fund investor's single most powerful ally.
- The Intelligent Investor, Benjamin Graham
- The Intelligent Investor, Benjamin Graham
