Some mutual funds are asking to be sold

You can sell a mutual fund for any number of reasons. You have to pay a child's tuition, for example. You want to travel. Or perhaps you want to build a creature in the basement.

Those aren't the only reasons for selling your fund. But before you send your fund into the outer darkness, you need to understand why you bought the fund.

The first reason to buy a fund is as a core holding � that is, you've decided how much of your overall portfolio should be in stocks, and purchased a fund because it fits your goals and your temperament as an investor.

Just because a fund is a core holding, however, doesn't mean that it's exempt from being sold. Here are three scenarios for selling a core holding:

�The Apple syndrome. Apple now accounts for about 20% of the Standard & Poor's technology sector. That's not because Steve Jobs held S&P analysts hostage in a Silicon Valley warehouse, although he may have toyed with the idea. It's because S&P indexes give more weight to larger companies.

Similarly, you may have a stock fund that has turned into a larger position than you'd like. Don't laugh. It happens. For example, suppose you'd invested $10,000 in 1992. You put $6,000 in a typical stock fund, and $4,000 into a typical government bond fund.

By March 31, 2000, your stock fund would have grown to 79% of your portfolio. Your bond fund � theoretically there to offset stock losses � would have been less effective than you wanted it to be. Your portfolio would have fallen 27% during the 2000-02 bear market.

But let's say that at the end of every year, you rebalanced. You sold enough of your winning fund to get the balance back to a mix of 60% stocks and 40% bonds. You would have lost 16%, rather than 27%.

Lagging returns

These funds, all with $1 billion or more in assets, have lagged their peers for the past one, three and five years.
�	Total return
Fund	3 years	5 years
Thrivent Large Cap Stock A	67%	-1%
CGM Focus	33%	-6%
Invesco Constellation A	64%	-6%
Brandywine Blue	51%	-8%
Pioneer Value A	59%	-17%
Dividends, gains reinvested through March 31. Source: Lipper.

�The BlackBerry syndrome.Research In Motion, maker of the once-ubiquitous BlackBerry smartphone, hit a high of $147.55 in June of 2008. It swooned to a low of $12.52 in December.

Bad news? Of course. But if your fund has taken a considerable hit, and it's in a taxable account, sell it to get the tax loss and reinvest in another fund, says Gary Schatsky, a New York financial planner. You can't reinvest in the same fund for 30 days, or the IRS will disallow your loss.

But taking the loss provides some comfort. You can use your losses to offset any amount of gains. If you have leftover losses, you can deduct up to $3,000 from your income. And you can carry any additional losses into the next tax year.

�The Magellan syndrome. Most people buy stock mutual funds because they believe in the manager. If your fund company changes managers, you may want to sell the fund.

Fidelity Magellan fund is an interesting example. After superstar manager Peter Lynch exited the fund in 1990, Magellan's next two managers, Morris Smith and Jeff Vinik, turned in good performances, but subsequent managers have turned the fund into a loser, lagging all but 5% of its peers the past 10 years, Morningstar says.

You shouldn't give your fund a decade. Most fund companies will give a manager the boot if he lags his peers for the past three years, and that's not a bad rule of thumb for you, either.

The obvious cure to worrying about management is to buy index funds, which almost always charge less in ongoing expenses. "I'd hope you put your core holdings into index funds," says Sheldon Jacobs, author of Investing Without Wall Street.

Not all of your holdings are likely to be core holdings, however. Most people own a few specialty funds, such as health care or real estate funds. "Sector funds are clearly a crapshoot," Schatsky says. "You're taking front-page news and using that to try and make a profit."

Given that a sector fund is primarily for short- to intermediate-term investing, you need to take a fairly coldhearted view of the fund. The easiest way is to set a stop-loss limit, selling if the fund falls by 10% from its most recent high. If you're dead wrong, you'll only lose 10%.

Some funds are so specialized, however, that they aren't worth bothering with. For example, you can now buy a fund that invests entirely in companies involved with solid-state hard drives. These are computer storage devices, used mainly in tablets, that are made up of memory chips.

Sold-state hard drives are swell. But it's a foolishly specialized sector. You'd be better off using your money for that creature in the basement.

John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. See an index of Waggoner's columns. His book,Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. John's e-mail is jwaggoner@usatoday.com. On Twitter: www.twitter.com/johnwaggoner.