My latest Washington Post column — it is in today’s print edition, but got lost on the way to being online — seems to have been recovered digitally.

The online version is (finally) published now:

“Most investors think long and hard about why they buy this fund or that — but they never think about when or why to sell.

They should.

This question involves huge sums of money. Ninety million individuals in the United States have $12 trillion invested in mutual funds. In terms of saving for retirement, mutual funds holdings account for 54 percent of 401(k)s and 47 percent of IRAs (in dollar terms). The 8,500 “Registered Investment Companies,” as these mutual funds are formally called, hold 27 percent of all outstanding stock of public companies in the United States.

Hence, most of your invested dollars in 401(k)s and IRAs are probably handled by a mutual fund manager.”

It was written to provoke some thought amongst main street investors who hardly ever think about those sell decisions.


When should you fire your mutual fund manager?
Barry Ritholtz
Washington Post, May 8, 2011

Category: Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “When Should You Fire Your Mutual Fund Manager?”

  1. GlennF says:

    Why own a mutual fund instead of an index fund or ETF at all? That’s the better question. If you’re picking mutual funds, you’re engaged in market timing with less control.

  2. super_trooper says:

    @ GlennF,
    why? Because you don’t have a choice. I have yet to work for an employer whose 401k allow me to invest in ETF. As boring as it may seem, the average worker probably have most of the exposure to stocks via their retirement saving accounts.

  3. super_trooper says:

    Sounds good, but for the average Joe, what readily accesssible tools do you have to keep track of these five points? Especially, how do you measure the dominant market trend and style drift when you live in Wasilla AK? “or loosing their edge”? Most investors have no idea who the fund manager is. Why not create a professional score card for these trends?

  4. Sechel says:

    Great topic.
    Here’s one that I wrested with Barry. PIMCO TOTAL RETURN recently changed it’s guidelines to allow some equity securities. To me this is a big divergence in style and possibly due to the massive size of the fund or the increasing difficulty of its managers to outperform. Another one was the Vanguard Bond funds that for the last several years decided to engage in swaps which bring up the issue of counter-party risk and the question of whether short synthetic positions in bonds are the same as owning the underlying credit.

  5. Glenn F:

    The very next sentence following the above excerpt is:

    “We shall leave the important question of active vs. passive investing — ETFs vs. mutual funds — for another column. (ETFs hold far less money, with less than a trillion dollars in assets). “

  6. Lyle says:

    The question might be why not an index fund if there are no etfs. The difference really is just that you can sell once a day instead of on demand. Does the 401k allow an index fund? (However likley its an expensive one not vanguard or fidelity. Of course if you are a follower of Boogle, you just believe that its best to not try to beat the market but come as close to its performance with a low cost index fund. (lowest costs is then closest to the market return)

  7. JimRino says:

    Off Topic:

    Here’s the best most concise interview, of the 2008 Real-Estate FRAUD Crash.
    This Recession was caused by FRAUD as a Formula for short term Robbery and destruction of a Bank.
    May 01, 2011

    Bill Black
    - FHBB: Federal Homeloan Bank Board.
    - Workd for the Reagon Administration: RE-regulation of the S&L industry.
    - Prosecuted: CEO’s Looted their S&L’s: 1000+ felony convictions.
    - Worked to convict the top 100 Worst S&L’s.

    - Today: Only 7 perp’s convicted today.

    - 10 Trillion Dollar lose of wealth in the US alone.
    - This cost 10 Million Americans their jobs.
    S&L fraud: 150 Billion

    Fraud is Embedded into this Crisis.

    Fish Rot From the Head.
    - Control Fraud, from the people who Control the Organization.
    - Weapon for Fraud: Accounting:
    - Grow like crazy
    - Make Really Bad Loans, at a Premium Interest Rate.
    - Have extreme Leverage.
    - Have NO Loss Reserves.
    Economists George Akerlof and Paul Romer explained in 1993 that accounting fraud is a “sure thing” and explained why it caused bubbles to hyper-inflate, …

    - CEO can report “fictional” Record Profits!
    - Company actually losing money.

    - The CEO DESTROYS the Lender, the Bank, but walks away with a hugh illegal payoff.
    - But, today the bank doesn’t go through bankrupcty, uses Political Connections to get Bailed Out.

    - Many of the banks are still here, and still under the control of the SAME CEO’s!

    - Banks EXTORTED FASB to Change Accounting Rules.
    - Banks don’t need to recognize loses! Income is INFLATED, bonus’s depend on Reported Income.

    Foreclosure FRAUD:
    - Made up Mortgage Documents!
    - 10,000 cases of Purgury!
    - No one has gone to Jail!

    Bank Fraud:
    - The Real prolem was: Lier’s Loans, began in California.
    - No Underwriting: No Bank Checking of Income!!!
    - No Underwriting = Massive Fraud = Bank will lose money.
    - These loans were: BORN BAD.
    - Market of 10′s of Millions who CAN NOT Repay their Loans.
    - The borrower isn’t the lier, it’s the Lender.

    - CEO incentivized FRAUD:
    - CEO incentivized Volume, ONLY Volume, bad loans are welcome.
    - Army of loan brokers, sell loans to others.
    - Impossible combination: low risk with high yield.
    - Two things to scam the process: - Debt/Income ration look small.
    - Loan/Value ratio: Inflate Market Value: Appraisel.
    - Black list of Honest Appraisers!
    Do Not Hire HONEST Appraisers!
    [ How to make a real-estate bubble. ]

    - MARI: 8th report 2006
    - ALT-A: A = PRIME: ALT-A: Supposed to be PRIME, without Underwriting!!!
    - ALT-A: Lier loasns: 90% RATE of FRAUD.
    - Industry INCREASES Fraudulent loans

    FBI warned in 2004!!!
    - Epidemic of Mortgage Fraud.
    - NO agency took action!!!
    - No Investigation, No Regulation of FRAUD.
    - 2008: Bbush attorney general Mukasey: REFUSES to create a National Task Force!

    Why Theoclassical Economists Fail as Regulators

  8. Plissken says:

    Are you talking about FAIRX in your article?

  9. dan10400 says:

    And if you are a 401K slave, then try even going to “cash”. For Fidelity, this gets dumped into a money-market account (not my definition of “cash”) which looses about 2% a year.

  10. Most people, sadly, don’t think long and hard about why they buy. They usually focus on the fund’s track records. A good track record is usually an indicator that the fund manager has already taken advantage of a certain niche. Once that niche has had a long period of high returns, those assets are usually overpriced.

    The old saying is that “a mutual fund does well until you put your own money into it.”

    I agree that investors need to have a process. Numerous studies show that the average mutual fund investor has returns far worse than the average return of mutual funds themselves. I believe that their buying strategies are almost as poorly thought out as their selling strategies. By chasing the hottest funds, they are doomed from the get-go.

    I also agree that they do put in more effort when they buy, but that effort is rarely rational and effective.

  11. dead hobo says:

    Fire Your Mutual Fund Manager sounds melodramatic. Moving from one fund to another or to cash is just a choice no different from selling a stock. Do you fire the board and management when you sell stock? Of course not.

    I have a relative who can’t take profits so he sees his equities rise and fall as the market rises and falls. He believes if it’s up today it will be up even more tomorrow and if it’s down it will come back. He’s over 60 and still working his ass off despite having/once having a large asset base. Not being able to sell is not limited to fund investors.

    I have no problem with mutual funds. Like all investments they have advantages and disadvantages. The worse part is the minimum holding period. Once you buy, you’re usually locked in for a minimum of 30 days. It forces you to think, “where is the market likely to be in a month or more?” Most cash type funds do not have this 30 day minimum. Once you’ve met the minimum holding period you can sell without worrying about sales timing. There is no fee. You get end of day prices. Think of it like steering an ocean liner.

    Funds are actively managed. ETFs are not. If a fund is a dog, sell it and buy into one that is moving. Is not drama queen stuff.

  12. dead hobo says:

    Although I can clearly understand firing some jerk off hedge fund manager who might have bet the farm on silver or $120 oil and now has to explain how nobody could have seen that coming.

  13. cthwaites says:

    Might want to add: “When there”s a portfolio manager change”
    More often than not, whether it’s voluntary or not, internal or external change or the PM goes in search of greener pastures, performance takes a dip.

  14. faulkner says:

    “When Should You Fire Your Mutual Fund Manager – (ie. Exit a trade).
    The fact that most 401(k) and IRA owners don’t know about this basic element of investing, much less how to apply it, speaks volumes about the industry and how it really works.

    BR: I would add to your list:

    * When the fund’s rate of trading (buying/selling) exceeds the rate of change of profit/loss (churning & chasing returns driving up transaction fees). Some funds turn over their portfolios at 200%/year.

    * When the fund has no stated “purge” strategy (methodology & timing) for removing non-performing holdings.

  15. ben22 says:

    nice rules, so long as the investor can get past the first problem, themselves:

  16. WaltFrench says:

    Of course the direct answer is “when you have reasonably good information that some other product will perform better than the one you hold.”

    Time and again, studies have confirmed that essentially the only information meeting that criterion is “fee levels.” Most fund investors buy based on information that is not predictive, is perhaps whimsical even. And they sell in order to buy, or to raise cash. The sell rule is perfectly good enough, if only the buy rule had been.