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Wall Street, California: Market Plunge | MUTUAL FUNDS

Thinking of Selling? Know the Facts First

September 01, 1998|PAUL J. LIM | TIMES STAFF WRITER

Days like Monday make some investors want to race to the phone to sell their stock mutual funds. Or at the very least, shift some of their stock holdings into safer, more stable investment options such as money market mutual funds.

Indeed, individual investors have been doing just that during August, mutual fund companies report.

But before you take this step, understand how such a move will affect your portfolio in the long term. Most important, remember that it's hard to know when the market will rise and you will want to be in again--that's why so many experts suggest investors stay in stocks for the long haul.

Then, realize some of the following restrictions in dumping a mutual fund, either in a taxable account or in your company-sponsored 401(k) retirement account.

It turns out that getting out isn't as simple as selling individual stocks.

* Not all 401(k) plans or fund companies allow you to sell out of your funds immediately. According to the Employee Benefit Research Institute in Washington, fewer than half of all 401(k) plans allow investors to shift investments on a daily basis. Indeed, according to a survey last year, 45% of plans still allow for only quarterly activity. So make sure you know what your 401(k) plan allows.

Also, some fund families, such as Vanguard, restrict phone transfers into and out of index funds. Instead, investors must write to the fund company to make such a move, which obviously takes time. Vanguard officials say they do this to prevent market timers from disrupting the fund.

* Some funds place restrictions on how many transfers you can make a year. At Fidelity Investments, for instance, some portfolios, by prospectus, limit investors to four exchanges a year. If you intend on making additional moves later in the year, make sure you don't waste your opportunity now.

* Sales are priced at the day's close. Let's say you tuned into CNBC early in the morning and decided to sell your stock fund when the Dow was down 100 points in early trading.

Unlike stocks, which can be bought and sold at different levels throughout the day, mutual funds are priced only once--at the day's closing net asset value.

That means you never really know at what price you'll be selling your fund's shares. On Monday, for instance, an early decision to sell ended up locking in a 500-point loss in the Dow. Who knows? On another day, the Dow may rally 500 points after opening down 100--and you could be selling into a rally.

* Your order may not even be placed that day. Dan Maul, president of Retirement Planning Associates in Kirkland, Wash., notes that some 401(k) plans may not be able to process your sell order immediately that day--especially if you call at or near the market's close of 1 p.m. Pacific time.

Indeed, if you make a decision to sell after the market closes, it won't be placed until at least the next day's market close. So there's no point rushing to a phone to make the exchange at that time, Maul said. Why not think about it and make a reasoned decision the next day?

* Outside a 401(k) account or other tax-deferred retirement plan, fund exchanges or sales trigger a taxable event. Rick Armellini, vice president and branch manager for Fidelity's Century City investment center, notes that investors often don't realize that even though their funds may be losing money recently, there may be taxable capital gains from previous years.

Obviously, exchanges in a 401(k) aren't taxable. But planners warn against shifting assets first in a 401(k) just because of the tax benefit. After all, 401(k) accounts generally represent "long-term money." As the saying goes, "Don't let your tax tail wag your investment dog."

* Watch for fees. If you decide to sell out of a fund, hesitate if it charges a back-end load, or a surrender charge for selling too early. Such fees will be wasted money if you reinvest in similar funds later.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

How the Largest Funds Did

The nation's biggest domestic equity mutual funds generally followed the market Monday, and now just four of 20 are positive year-to-date. Many of these funds are offered in 401(k) retirement plans.

*--*

Fund Assets (billions) 1-day* 3-month* YTD* Fidelity Magellan $75 -7.3% -12.5% -1.0% Vanguard Index 500 61 -6.8 -11.9 -0.4 Washington Mutual 47 -4.7 -11.6 -1.9 Investment Co. of America 46 -5.0 -11.7 -2.3 Fidelity Growth & Income 45 -6.5 -10.7 -0.4 Fidelity Contrafund 35 -7.1 -9.8 +0.3 Vanguard Windsor II 31 -5.1 -15.6 -4.4 American Century Ultra 28 -8.2 -11.8 +2.0 Vanguard Wellington 25 -2.8 -8.7 -1.0 Fidelity Puritan 25 -4.1 -8.1 -0.3 Fidelity Equity Income 25 -5.6 -16.7 -8.4 Fidelity Adv. Gro. Opp. 24 -5.3 -10.7 -2.5 Janus Fund 23 -8.1 -11.8 +1.1 Vanguard Windsor 22 -5.3 -24.9 -16.5 Income Fund of America 22 -1.7 -8.3 -2.5 Europacific Growth 21 -1.1 -13.1 -1.3 New Perspective 18 -3.7 -12.1 +2.5 Fidelity Equity Income II 19 -6.7 -12.9 -2.3 MSDW Dividend Growth 18 -5.0 -12.8 -1.8 Putnam Growth and Income 12 -5.5 -15.8 -8.8 S&P 500 index -6.8 -11.9 -1.3

*--*

*Total returns through Monday

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