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How to simplify portfolios

Meg Richards Associated Press

NEW YORK (AP) — When your home or car no longer suits your lifestyle, it’s usually pretty obvious. But knowing when to sell a mutual fund that no longer fits your portfolio can be more difficult.

For most investors, buying shares of a mutual fund, a stock or a bond is a big deal, so it makes sense to research the options. We’re rarely so analytical when it comes to selling, however, and sometimes we just never get around to it. But if you’re focused solely on shares accumulation, you might wind up with a disorganized portfolio, and that can cut into your overall return.

“The selling process is emotional and psychological. People can feel very attached to funds and stocks,” said Vernon Lee of Lee Investment Consulting in Raleigh, N.C.

Inexperienced investors often collect mutual funds that overlap, Lee said. For example, investors might believe their portfolios are diversified because they own several different funds, but they’re oblivious to the fact that the funds are all growth-oriented with many of the same holdings. Others like to snap up shares of hot funds when they hear pundits talking about them, but are reluctant to sell at a loss when they underperform.

If you’re wondering whether your portfolio needs some trimming, there are a few questions you can ask yourself, starting with why you bought the funds you own.

If a fund has changed significantly while you’ve owned it, you need to make sure it still fits in with the rest of your investments. A shift in sector focus or style isn’t always a signal to sell, however. Many of the best managers seek opportunistic values among beaten down stocks, which means their portfolios will change with the market cycle. But if the manager seems to be veering from the true spirit of the fund, that could be cause for concern.

Whether the fund has changed or you misunderstood its fundamentals in the first place, you should evaluate its performance against an appropriate benchmark, usually a stock market index, before you decide to sell. Look for striking deviations, both positive and negative. One effect of the bear market is that it gave investors an idea of how different funds will behave in a variety of economic climates. Mergers of fund providers can also pose a worry, as they often lead to management upheaval. And then there’s the market-timing scandal — if the company running your fund has been fined for tolerating improper trading practices that cut into the returns of small investors, you might decide to take your business elsewhere.

Many of the companies involved in the case have been associated with other types of shareholder unfriendliness as well — such as rolling out gimmicky funds and charging extremely high management fees.

Some brokers and advisers win higher fees for selling their own company’s products, or funds from a preferred list of fund providers. A number of large companies have paid millions to settle charges they failed to properly disclose such arrangements.

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