Mutual Funds

[Reldon]

Hi,

I have a quick question. Let say if you have 50000 in mutual funds and we have another downturn like in year 2000, would you take the money out or keep it all in the mutual fund and ride the wave out?

Thanks

[safari]

Well, of course, if I knew when the downturn started and when it's going to end, I'd definitely take the money out of mutual funds and stocks and invested in safe securities. However, it's impossible to predict how the market will behave.

[mbhunter]

Mutual funds can be just about anything. I'm guessing you're talking about stock mutual funds .

Depends on all sorts of things: your investing horizon, your total investments, other life events around the corner, your tolerance for risk, and your knowledge of the markets. For example, if you are looking to invest in a college education soon, you might not want it in stocks. That's just one what-if.

[meaghanchan]

I would keep my money in there. More money has been lost than gained by trying to time the markets.

[disneysteve]

I would, and I have, left the money in and continued to dollar cost average additional purchases of fund shares. Since you don't know when the fund will decline or when it will start to rise again, you'd likely end up selling low and buying high, which is what many many people do. Timing the market is impossible.

[twins0203]

How does taxes on the earnings that the mutual fund make work? Do you only get taxed on it when you sell out or whatever is earnings at the end of the year?

[disneysteve]

Interest, dividends and capital gains are taxable in the year they are paid, even if you reinvest the proceeds into additional shares of the fund. That is one reason why people like index funds - they tend to be fairly tax efficient because they don't do much trading. Actively managed funds tend to trade more often and can sometimes generate substantial gains.

ETA: This assumes you are talking about a non-retirement account.

[Ima saver]

I have stayed in the same mutual funds for about 18 years. I don't cash out when things get tough.

[Frugal Father (tm)]

Sit still. Also check your funds...you may want to rebalance once a year but stay the course this is sound advise after paying off your debt of course which gives you the best return on your money.

[jmjj215]

I would recommend looking at rebalancing every quarter - but only if rebalancing really needs to occur. A few points one way or the other as far as your allocation goes isn't too big of a deal.

[twins0203]

Hate to ask such a simple question, but being a newbie to mutual funds I have no idea. What exactly is "rebalancing" your account?

[LuxLiving]

Hi twins0203 -

Simple explanation:

Let's say that you've decided because you are young and want your money to grow long term that you should have your 'asset allocation' to be in an 'aggresive' mix of 80% stocks, 15% bonds, and 5% cash equivalents. This is your roadmap so to speak.

Over the course of the year your stock portion has grown to be 83% percent of your holdings, and bonds are down to 12% and cash equiv. are still at 5%. Rebalancing gets you back to your 'map' you set at the beginning of the journey.

So, you'd have your broker sell the stocks back down to the 80% position and reinvest the proceeds to bring your bond holdings back up to 15% and the cash equiv. would stay the same until whatever time in the future it's time to rebalance again.

Does that help?

[disneysteve]

Originally Posted by LuxLiving

So, you'd have your broker sell the stocks back down to the 80% position and reinvest the proceeds to bring your bond holdings back up to 15% and the cash equiv. would stay the same until whatever time in the future it's time to rebalance again.

Another way to rebalance is to change where new money goes. For example, one of our mutual funds had a banner year a while back and was up 70% for the year, making it an overly large portion of our portfolio. So I stopped putting new money in for a while and redirected that money into other funds until the allocation evened out again.

[twins0203]

Yep, that sure does help Thanks!

[LuxLiving]

An appropriate quote:

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"One thing is clear: Style drift happens to a sizable percentage of mutual funds...For [investors or] planners seeking to create portfolios tapping into consistently different equity styles, style drift presents a significant concern." -Craig L. Israelsen, Ph.D, "Drift Happens", Financial Planning Interactive

</TD></TR><TR><TD height=29></TD></TR></TBODY></TABLE>
IOW, on what the SPECIFIC objectives were of the funds you get into - you have to appreciate the fact and guard against that w/management changes, world news, shifting values, etc., the fund you now have may be significantly different than what you started out with. Got to keep reading those prospectuses when they come in the mail!