Mutual Funds: Knowing When to Fold 'Em

Oct. 13, 2009 — -- The question from a California reader is simple enough: How long do you hold on to a stinker of a mutual fund?

Before you can answer the question, however, you have to know one thing: Is it really a stinker in a class by itself? Or did it just stink like everything else?

Looking for financial advice? Click here to send David your questions and they might end up as a topic for his next column.

Q: In my 401(k), a lot of mutual funds have either recovered or are close to recovering from where they were a year ago. However, I still have mutual funds that are down 20 to 30 percent from their highs. My question to you is how long should I hold these mutual funds to allow them to recover, or should I sell them now for a loss and move into something else?
- D.J., Manteca, Calif.

A: D.J., I would agree now is a great time to review the mutual funds in your 401(k) plan. It would have been tough to make a rational decision about whether to switch funds during the market meltdowns late last year and early this year.

But now that we've experienced a bit of recovery and investors are feeling more confident, it's easier to make a sound decision that is not driven by panic.

The first thing I would do in reviewing your mutual fund holdings is to straighten out the time periods you're using for comparison.

In the first part of your question, D.J., you say many of your funds are close to recovering from where they were a year ago. But then in your next statement you say other funds are still down 20 to 30 percent from where they were at their peak.