The Top 8 Reasons NOT to Buy & Hold
A, B, or C Share Load Mutual Funds...
1. They Can't Go To Cash In Bad Times.
Most mutual funds have to stay invested generally between 65-80% (by Prospectus), which means that at any given time they can only sell 20-35% of their holdings.
2. You Never Know If They "Change Portfolio Managers"
When you're investing in a mutual fund, you're investing because of their investment philosophy and track record for success. If they suddenly change portfolio managers, that track record just walked out the door. If the reasons you trusted them with your life savings are gone...wouldn't you want to know that?
3. 87% of Mutual Funds Mirror the Stock Market
If they can't go to cash, and they don't beat the S&P 500 Index then why are you paying 1, 2, or even 3% a year in management fees? Don't you invest in mutual funds because they are supposed to have a strategy for beating the market or - at the very least - mitigate the risk of being in the market?
4. You May Be PAYING HIGH LOADS (i.e. 5.75%) and Expensive 12-b1 Fees of .25% to 1%
You may be paying these fees every year as part of a "Buy & Hold" Strategy.
5. The Stock, Mutual Fund, Asset Class or Sector Goes "Out of Favor" and The Client Doesn't Know It.
Whenever there is a change in the "out of favor" status of investments it generally represents a change in investment behavior by the mutual fund. If the investment philosophy of your mutual fund has changed, wouldn't you want to know about it before they made the change and invested your assets in a manner that was different than when you first purchased the fund? After all you picked the mutual fund based on their OLD philosophy, not their new philosophy.
6. Some Funds Hold "Too Much In Assets."
Success can be a bad thing, with some funds growing so large that they can no longer effectively manage the fund. For example, Fidelity Contrafund (FCNTX) has $111 Billion in assets; to make a significant move it would have to buy 111 different company stocks at $1B each. Can you imagine trying to move all those assets during a market downturn? For more information read this insightful article by Investopedia.com
7. 80% of Bear Markets Occur In June, July, August, September, and Most of October.
How do you protect yourself? If the mutual funds can only pull out 20-35% of their assets, and if they're as large as FCNTX's $1119B, that's a lot of money to protect. So, what's your market exit strategy? Discover how we choose our money managers, and how we address this issue for our clients.
8. If a Broker Sells a Load Stock Mutual Fund, and Receives The Commission She/He Can't Tell The Client To Sell & Buy Another Load Mutual Fund.
So, unless the client could move to another load fund within the fund family at no sales commission, they could lose out due to inaction while a determination is made on how to reinvest the assets.