Changing funds now or later

[Katsmeow]

Generally in a downturn I don't do anything. I just wait it out, perhaps rebalancing as necessary. I don't generally believe in trying to figure out what the market is going to do.

So with the recent unpleasantness I would not normally want to lock in losses that I would expect would ultimately rebound.

But, there is a bit of a twist here. Shortly before everything started going down I was about decided that I wanted to do two things (1) simplify funds and (2) slightly reduce stock allocations. I am 66 and DH is 72. We have had a 55/45 allocation for years and I was considering reducing to 50/50 or even 45/55. I did start doing some things. I first sold my International Fund (this was mid-February) and reduced the allocation to 50/50.

The other thing I was considering was whether to sell my Mid Cap and Small Cap funds (FSMDX and FSSNX) to just put everything in FSKAX. (We split our money between Fidelity and Vanguard. At Vanguard we have total Stock market, total bond and Wellesley. At Fidelity we had the above plus FXNAX which is US Bond).

I had bought the mid cap and small cap funds when I rolled my 401k into an IRA. I had been not excited by them as they were lagging the total market fund and as part of wanting to simplify our investments I was wondering if I really needed to have them. So, I was considering simply selling them and putting some of the resulting funds in the Total Market fund and some in the US Bond fund to perhaps reduce our allocation.

But then everything went down. I have felt sort of paralyzed since then. Both the Mid Cap fund and the Small fund have gone down more than the total market fund. So I feel like if I sell them now, even if I put some of it back into the total market fund, I am locking in the loss. The total loss on the two funds is about 3.5% of my portfolio. The loss on the two funds, though, that is in excess of the total market loss is about 1.3% of the portfolio.

So I feel like if I sell those two funds I am locking in an excess loss of 1.3% even if I put all of if it in the total market fund.

What I am struggling with is that I was thinking about selling these funds before all this started happening. From that standpoint, I should just go ahead and do what I would have done if this hadn't already happened. On the other hand, I don't like locking in the losses. But, it could be a long time until these funds come back completely. And, in the meantime I am annoyed owning something I really don't want to own.

Given the situation should I just go ahead and sell the two funds or should I just wait until they have recovered more? I would plan to sell them and probably put it all in the total market fund right now.

[Dtail]

Tough call.
I did get rid of Small Cap and International this January, as was just not convinced of the reversion to mean vs. the large caps.
Plus also to simplify having less funds. It was in an IRA, so no tax effect.
My vote would be to sell it, if you don't believe in them and believe any further upswing will get you more bang for the buck in the Total Market.
Lastly, you still get a little mid cap/ small cap exposure in the Total Market as a minor point.

[DrRoy]

When in doubt, you can split the difference and do half.

[VanWinkle]

I'm in a similar situation due to tax loss harvesting last year. I sold some Total Market last year and bought some S&P 500 as a similar investment to harvest losses in VTSAX. I added the Extended market fund in my Roth to give me the mid and small cap I was missing in the S&P 500. Now this year, I sold the S&P 500 to harvest the loss and replaced it with VTSAX. But I still own the extended market fund and now have a small cap tilt I never intended to keep. With the downturn and no way to get a tax benefit selling the Extended market, I will likely hold it until the overall market recovers before selling. It is about 9% of my total portfolio, or about 18% of my equities.

[COcheesehead]

I added small cap exposure at or near the bottom with WAMCX. It’s been my best performer since then. Maybe you are in the wrong fund.
Small and mid caps can be more volatile and I look at them for only a portion of my equity allocation.
I am one for licking my wounds and moving on if I feel I made a bad decision.
You can also just sit tight and see what the market gives you.

[LOL!]

If you do decide to sell your small cap fund, then at least sell on a day when small cap ETFs are going way up. An example was April 29 when small-caps went up more than 5% in a single day. If you look at what small-cap ETFs are doing during the day, then you will know before the deadline to submit your mutual fund order that your fund will go up quite a bit that day.

Conversely, don't sell on a day when small-caps do worse than the broad market.

[OldShooter]

Quote:

Originally Posted by Katsmeow ... Given the situation should I just go ahead and sell the two funds

that's what I would do, but I have a world view that making sector bets is a bad idea for just the reason you have discovered: Sectors are unpredictable. The Callan "quilt chart" illustrates: https://www.callan.com/periodic-table/

Quote:

Originally Posted by Katsmeow ... or should I just wait until they have recovered more? ...

We humans are loss-averse. I suggest that you buy and read Jason Zweig's "Your Money & Your Brain." You'll learn quite a bit about this and other unproductive behaviors that evolution has given us, including the very important "endowment effect."

And, if you like that one, the next level up is Nobel winner Richard Thaler's "Misbehaving." (https://www.amazon.com/Misbehaving-B.../dp/039335279X)

[Katsmeow]

Quote:

Originally Posted by LOL! If you do decide to sell your small cap fund, then at least sell on a day when small cap ETFs are going way up. An example was April 29 when small-caps went up more than 5% in a single day. If you look at what small-cap ETFs are doing during the day, then you will know before the deadline to submit your mutual fund order that your fund will go up quite a bit that day. Conversely, don't sell on a day when small-caps do worse than the broad market.

Yes, I have been keeping an eye on this and have noticed the sometimes large difference. I think I will basically do this.

[audreyh1]

Small cap recovered quite a bit since March 20.

I don't see why you should not go ahead and exchange the two funds into FSKAX, if that is what you prefer to own. Sure, they might recover more, but FSKAX will also likely recover more at the same time, so it's kind of a wash.

If you do an exchange, where you sell and buy on the same day, the ups and downs of a given day don't matter so much.

[LOL!]

Quote:

Originally Posted by audreyh1 Small cap recovered quite a bit since March 20. I don't see why you should not go ahead and exchange the two funds into FSKAX, if that is what you prefer to own. Sure, they might recover more, but FSKAX will also likely recover more at the same time, so it's kind of a wash. If you do an exchange, where you sell and buy on the same day, the ups and downs of a given day don't matter so much.

During normal low-volatility days it doesn't matter so much, but these are not normal low-volatility days.

One can easily see past performance and chart it, so one can see that recent past performance of FSKAX and the other fund are not similar. OTOH, maybe small-cap never catches up again and exchanging now is a good idea.

[audreyh1]

You never know on a given day, but today small cap went down less than total stock market. Volatility has dropped quite a bit. It will be impossible to time perfectly and probably would require a super long recovery wait which the OP doesn’t seem inclined to do. I think looking forward, if the stock market does sell off sharply again due to economic outlook, it’s just as likely that small caps will underperform again.

Very hard to know ahead of time, so you makes your bets and takes your chances, and then ignore the outcome as the OP goal of simplifying was accomplished.

[Navigator]

There is no reason to believe tomorrow or any other day will be a better for making changes in your portfolio. While I do not believe your changes are good for the long term, if you do, there is no reason not to do so today.

[donheff]

I was planning something similar (different AA but similar simplification) but hesitated for the same reasons you cite. When I decided I needed a bigger cash cushion in case the market really tanks over the next year, I bit the bullet and sold the fund I wanted to get out of.

[audreyh1]

I plan to simplify as well, ultimately probably mostly total stock market. But I also had envisioned this change occurring more like 15 to 20 years from now.

In the meantime, having sizeable allocations to small-cap, mid-cap and international stock funds did well for me over the past 20 years, even though they got pummeled harder every time we entered a nasty bear market. So I’m willing to wait it out again.

[LOL!]

Quote:

Originally Posted by LOL! If you do decide to sell your small cap fund, then at least sell on a day when small cap ETFs are going way up. [...] Conversely, don't sell on a day when small-caps do worse than the broad market.

Today is the day that small caps are going way up. IJS is up over 4.5% as I type this while some total-market funds are only up about 1.85%.

There are still a few minutes to submit an exchange order.