How long should I hold a fund before selling it? How do I know when it’s time to sell?

Paul's Answer:

There is no magic formula for determining the perfect time to sell an investment.

With that said, here are some guidelines.

• Sell a fund when your investing plan calls for a sale. In other words, don’t sell for emotional reasons, sell for thoughtful reasons. One example: If you use market-timing, sell whenever your system issues such a recommendation.
• Hold a fund long enough to evaluate its performance over a complete market cycle, at least four or five years. If you regularly move in and out of funds more frequently than that, you are in reality just gambling and seeking the luck that may bring you short-term performance.
• It may be time to sell a fund when its performance has seriously lagged its peers for an extended time, perhaps two or three years.
• It’s time to sell a fund when you need the money.
• It’s time to sell a fund when it no longer meets your needs. If you have done a good job of selecting the fund initially, this will only be the case if the fund changes its objective or investment style, or if your needs change.
  

Some investors make the mistake of holding onto funds for too long. But they are in the minority. Many, many more investors err on the side of selling funds without giving them time to show what they can do. Over a lifetime of investing, if you select well at the start, your returns will probably be inversely proportional to the frequency of your trades.