Beware the seven deadly fund sins

Buying and holding investments is often best, but sometimes it’s smart to sell. Shannon Zimmerman, who heads up our Motley Fool Champion Funds newsletter service, recently offered seven reasons to consider selling your mutual fund:

1. The manager has departed. This is an issue primarily if you own the fund on the strength and reputation of the manager — as you should. There’s nothing inherently magical about a mutual fund, after all. It’s only as strong as the person who’s calling the shots. Thus, if you don’t have confidence in the replacement, you should consider moving on, too.

2. The strategy has changed. If your fund’s strategy seems to be changing over time — or worse, with the winds — you might consider cutting it loose.

3. Prolonged period of underperformance. Anything over three years is worth looking at, but only if you determine that the reasons you bought the fund are no longer valid. Market trends, for which no manager is to blame, can be surprisingly durable.

4. Expenses are high or on the rise. Costs count. You want them low to begin with and to stay that way. Creeping expenses demand a watchful eye, and you should expect a fund’s price tag to fall as its assets under management rise.

5. Getting too darn big. If a fund shop lets a small-cap fund grow to the point where it’s no longer nimble, this can be murder on performance. When funds have too much money, they run out of good places to invest it.

6. Lack of shareholder friendliness. If expansive shareholder letters turn evasive or terse, or the fund replaces its managers’ names with “Management Team,” take a hard look. Be especially on guard when small shops are absorbed by bigger players.

7. Scandal. If your fund is implicated in the mutual fund scandal (and it wouldn’t cost a great deal to do so), consider moving on.

The funds Shannon has recommended in Champion Funds have more than doubled the market’s returns. Try the service for free (at www.fool.com/ shop/newsletters) and read all about them.

Ask the Fool

Q: What do the terms “bull” and “bear” mean? — A.B., Tucson, Ariz.

A: You’re a bull, or “bullish,” on a particular stock or the market if you expect it to go up. A “bear” is pessimistic, perhaps expecting a market drop in the near future. We Fools aren’t interested in guessing what the market will do in the short term, but we’re long-term bulls. Over many decades, the stock market has returned an average of about 10 percent per year — and that’s despite market crashes, world wars and the Great Depression.

Q: How does online stock trading work, and is it safe? — T.K., Detroit

A: If you’re comfortable making your own investment decisions, you may find online trading preferable to old-fashioned alternatives. It’s generally less expensive, with some commission rates lower than $8 per trade. Also, you can examine orders carefully before placing them, and you can review your portfolio at any time.

To trade online, all you need is a computer and Internet access (and some money to invest, of course). Visit the Web site of any brokerage you’re interested in, and you’ll likely find it offers online trading. You simply open an account (the Web site should tell you how, offering forms to download or a phone number to call) and mail in a check. They’ll send you an account number and password — use those to log in at the Web site. From there you can check the status of your account or place an order.

All reputable online brokerages have security measures in place. Before opening an account, read up on them at the Web site, or call and ask, to ease your mind.

Learn more about online brokerages at www.broker.fool.com and www.smartmoney.com/ brokers.

My dumbest investment

I graduated from college in 2000, with about $20,000 invested at the time. Most of it was invested in Huntington Bancshares, inherited from my grandmother. In early 2000, the stock price took a bit of a hit. At that point I figured I’d take my little nest egg and invest in a company that I picked myself. My uncle, a successful investor, recommended Philip Morris, Boeing and Excite@Home. Philip Morris (now Altria Group) and Boeing seemed boring.

So with the knowledge that cable Internet was the wave of the future, I sold my entire position in Huntington and put all my money in Excite@Home — and rode it down to $0! This caused a great deal of stress for me over the next several years, but I feel extremely fortunate to have learned such a hard lesson at a young age. — Joey Mapes, Kalamazoo, Mich.

The Fool Responds: You’re right — many investors learn about the importance of diversification and stock research later in life, when they have less time to make up their losses.