When and how do you move out of a mutual fund?

[Andrew Jackson]

I know this question is kind of broad and depends on probably many different factors. But maybe someone could help.

Now the idea with mutual funds is that you are supposed to just let your money sit and ride everything out. But what about the 2008 bear market? Surely, if you were in an S&P index fund, like I currently am in now, you wouldn't have wanted to just let your money sit and ride the market out right? At what point does one decide to take money out? How much do you take out? Do you take money out in smaller chunks over a longer period of time until the market corrects itself? Or do you just take a large lump sum out.

[Andrew Jackson]

Here is the 07-08 bear market and the monthly returns for reference. Now knowing that the market and index fluctuates month to month constantly. Can one look at this past history and know to start moving out in month X?

The months in Bold are the months with negative returns.

02/2009 735.09 -90.79 -10.99%
01/2009 825.88 -77.37 -8.57%
12/2008 903.25 7.02 0.78%
11/2008 896.24 -72.52 -7.49%
10/2008 968.75 -197.61 -16.94%
09/2008 1166.36 -116.47 -9.08%
08/2008 1282.83 15.45 1.22%
07/2008 1267.38 -12.62 -0.99%
06/2008 1280.00 -120.38 -8.60%
05/2008 1400.38 14.79 1.07%
04/2008 1385.59 62.88 4.75%
03/2008 1322.70 -7.93 -0.60%
02/2008 1330.63 -47.91 -3.48%
01/2008 1378.55 -89.81 -6.12%
12/2007 1468.36 -12.79 -0.86%
11/2007 1481.14 -68.23 -4.40%

[feh]

If you're investing for the long term (don't need the money for at least 10 years), then yes, you leave the money in the fund. We had large amounts of money invested when things went south 2 years ago; we never withdrew anything.

People who try to time the market generally do their balance more harm than good.

If your time frame is shorter than 10 years, you'd want to invest in something less risky than a 100% stock mutual fund.

[disneysteve]

But what about the 2008 bear market? Surely, if you were in an S&P index fund, like I currently am in now, you wouldn't have wanted to just let your money sit and ride the market out right?

That's exactly what we did. Not only that, but we continued to invest every single month. It is called dollar cost averaging and allowed us to take advantage of the market downturn to buy more and more shares of the fund so that when it went back up, we were in an even better position to benefit from the recovery.

[feh]

That's exactly what we did. Not only that, but we continued to invest every single month. It is called dollar cost averaging and allowed us to take advantage of the market downturn to buy more and more shares of the fund so that when it went back up, we were in an even better position to benefit from the recovery.

Exactly. It's called "buy low, sell high". Folks that freak out when the market drops end up "buying high, selling low"; the exact opposite of what you want to do.

A year ago when the DOW was under 7000, I was really bummed I didn't have some spare cash to invest.

[nest egg investor]

Selling Mutual Funds

There are some very simple technical tools that can be used to move out of the market, such as the 200 day moving average. This can easily be added to a Yahoo chart. While there are pros and cons of moving in and out of the market, such as transaction fees and taxes (in taxable accounts), the 200 day moving average is a longer term tool that would not trigger a lot of transactions, yet greatly reduce portfolio swings. It would have been a great tool to use from 2000 to 2010, as well as most other time frames! Simply open a long term yahoo chart and add the 200 day moving average to it.
Good luck!

[disneysteve]

There are some very simple technical tools that can be used to move out of the market, such as the 200 day moving average. This can easily be added to a Yahoo chart. While there are pros and cons of moving in and out of the market, such as transaction fees and taxes (in taxable accounts), the 200 day moving average is a longer term tool that would not trigger a lot of transactions, yet greatly reduce portfolio swings. It would have been a great tool to use from 2000 to 2010, as well as most other time frames! Simply open a long term yahoo chart and add the 200 day moving average to it.
Good luck!

There are a whole slew of charts and methods for timing the market and they all have one very important thing in common: THEY DON'T WORK!

[Andrew Jackson]

That's exactly what we did. Not only that, but we continued to invest every single month. It is called dollar cost averaging and allowed us to take advantage of the market downturn to buy more and more shares of the fund so that when it went back up, we were in an even better position to benefit from the recovery.

I guess that makes sense. But I thought people also used DCA in general, even when the market goes up?

[Andrew Jackson]

Just googled dollar coast averaging and came across this:

Dollar Cost Averaging

It really helped to make DCA make sense in my mind.

[disneysteve]

I guess that makes sense. But I thought people also used DCA in general, even when the market goes up?

Exactly. The whole point of DCA is to invest steadily over time, no matter what the market is doing. When the market is up, your investment buys fewer shares. When the market is down, your investment buys more shares. Over time, DCA will typically result in a lower average cost basis because of this.

The herd tends to pile into the market when it is at a peak and hitting new record highs every day and then run for the exit when prices drop, thereby accomplishing the "buy high, sell low" issue that costs people thousands of dollars. DCA avoids that herd mentality and lets you actually grow your money consistently over time.

[jIM_Ohio]

I know this question is kind of broad and depends on probably many different factors. But maybe someone could help.

Now the idea with mutual funds is that you are supposed to just let your money sit and ride everything out. But what about the 2008 bear market? Surely, if you were in an S&P index fund, like I currently am in now, you wouldn't have wanted to just let your money sit and ride the market out right? At what point does one decide to take money out? How much do you take out? Do you take money out in smaller chunks over a longer period of time until the market corrects itself? Or do you just take a large lump sum out.

change mutual funds when your risk profile changes.

If the current market performance changes how much risk you take, you are not thinking clearly, IMO.

In a bull, many people like to take on MORE risk
In a bear, many people want to reduce their risk

that is buy high, sell low

the markets ups and downs is the risk you take, the market ups and downs should not change the risk you take, your life status should define that risk (and be defined with an asset allocation you can control and are comfortable with).

[disneysteve]

At what point does one decide to take money out?

change mutual funds when your risk profile changes.

Other times when you might want to get out of a fund:

Fund management changes
Fund investment style changes
Fund performance is lagging relative to it's peers
Fund expense structure changes

None of those are absolutes but all are reasons to take a good look and see if the fund is still worth keeping.

[Andrew Jackson]

change mutual funds when your risk profile changes.

By this do you mean getting out of an index fund and getting into a fund with more bonds and cash holdings when you are within a few years of when you want to use the money?


Also, what do you guys think of this article? It basically slams DCA saying that you are better off without it. The costly myth of dollar-cost averaging - MSN Money

However, the article was written five years ago. Well before the last big bear market. And I think it make sense to deposit a large lump sum when the market is going higher every year. But it seems to me DCA is much better in an unpredictable market and can help prevent unnecessary losses. The author basically states his belief that long bear markets are rare and should not be taken into consideration. But I wonder if he feels differently now that we have had two bear markets in the last 10 years alone. The example he uses for why lump sum is better than DCA is only for the year 2004 which was a good year for the market but where are his examples for down years?

[disneysteve]

Also, what do you guys think of this article?

It is bogus. He picked one fund and looked at the return over one year when it happened to go up nicely. He also compares his lump sum purchase to quarterly DCA or "random" purchases which aren't really random at all. What he calls random is also DCA, investing $300 every few weeks, a total of 10 times throughout the year. In fact, even lump sum investing still counts as DCA. If you put $3,000 in once a year, every year, for 10 or 15 or 25 years, that is dollar cost averaging, too. The only thing that isn't DCA is if you make one lump sum purchase and never invest in that fund again.

[jIM_Ohio]

By this do you mean getting out of an index fund and getting into a fund with more bonds and cash holdings when you are within a few years of when you want to use the money?


Also, what do you guys think of this article? It basically slams DCA saying that you are better off without it. The costly myth of dollar-cost averaging - MSN Money

However, the article was written five years ago. Well before the last big bear market. And I think it make sense to deposit a large lump sum when the market is going higher every year. But it seems to me DCA is much better in an unpredictable market and can help prevent unnecessary losses. The author basically states his belief that long bear markets are rare and should not be taken into consideration. But I wonder if he feels differently now that we have had two bear markets in the last 10 years alone. The example he uses for why lump sum is better than DCA is only for the year 2004 which was a good year for the market but where are his examples for down years?

How do you currently define your risk profile?

when that profile changes, its time to consider changing the mutual fund.

How you define your risk profile and how I define mine might vary.

I am sure Disney Steve has a 529 plan for his daughter's college- as the risk profile for the mutual fund changes, the probabilty of changing mutual funds increases. This would be a different risk profile than you have, and different than what I have... If the investment is an age based portfolio, you need to ask yourself if your risk profile matches the one for the fund "right here, right now".