The Best Time To Buy And Sell Mutual Funds To Make The Most Money

We have all been on a month-long rollercoaster ride with the stock market due to COVID-19 and unfortunately, it doesn’t show signs of normalizing in the near future. For that exact reason, it is more important than ever to look back at your goals and reasons for why you are investing. There is absolutely no reason to panic since no good can come of it. Selling everything you have in your portfolio will do you far more harm than good. That said, it is also important that we don’t buy irrationally either. In this article, we will look at when the best times are to buy and sell mutual funds and I hope to bring you comfort during these uncertain times.

What Are Mutual Funds

I like to think of mutual funds as buckets. In these buckets, you own multiple stocks from various companies but instead of buying each individually, you got a deal where you get to own several different stocks in one single investment.

Mutual funds are favored by investors due to their simplicity. As mentioned above, you own multiple companies in one single investment so you don’t have to dig around and do multiple trades to get fully diversified. Instead, with one trade you are incredibly diversified. Additionally, due to the nature of owning multiple companies in one mutual fund you are also reducing your portfolio risk.

These investments come in many different flavors. You can buy mutual funds by the market indicator (ex. S&P 500), by the commodity (ex. gold) or even by company size (ex. large-cap). There are plenty for types so I am sure there is a mutual fund out there that sparks your interest and aligns with your goals.

When you begin to research mutual funds, make sure you are choosing which to invest in based off of your personal finance goals. Do not choose to invest in a mutual fund because your friend is invested in that specific fund. Your portfolio needs to match your goals.

When To Buy Mutual Funds

We recently switched into a bear market. What does this mean? A bear market is when prices are consistently falling and there is a generally negative outlook towards the markets. Well, the U.S. was on a streak of a bull market (prices increasing, positive outlook for markets) for quite some time and we knew this was going to end at some point. A good way to remember the difference between a bear and bull market is to think about how each animal fights. A bear comes down at its prey with its claws, hence the prices falling while a bull will attack by jabbing it’s horns up into its prey. This is what I use to differentiate the two at least.

All of that outlined above makes it pretty obvious that the best time to buy a mutual fund would be during a bear market while prices are declining. YOU ARE IN LUCK! The current bear market doesn’t show any signs of slowing down in the near future so now would be a smart time to really take a look at your investment strategy and what funds can help you reach your goals. Think about this bear market like discount shopping, you are getting hugely discounted shares of funds which can greatly help increase the value of your portfolio in the long-term.

Before we look at what is typically suggested for buying mutual funds, it is important to note that timing the market should never be your plan. You should be making data-driven decisions. Timing the market has, time-and-time again, been the #1 reason why investors lose money in the stock market. The same should be said for day-trading. Although there are plenty of guru’s out there who have smoke fuming out of their ears for me saying it, I think they are full of it. That is all speculation and gambling. Sure, you can evaluate patterns all you want but in the end, no one on this planet can predict the stock market.

With that, here is what is typically recommended to buy during specific times of the market cycle:

1. Small-Cap Mutual Funds –> Buy in the early economic recovery period when interest rates are very high but starting to decrease. This is because smaller companies are not reliant on interest rates in comparison to larger companies. They can adapt and move much quicker in these environments than a large company can.
2. Value Mutual Funds –> Buy when the economy is in a recession. This is when you need to switch to a value strategy because not as much money is being pumped into the markets by investors so you are solely looking for funds that are valuable.
3. Growth Mutual Funds –> Buy when the economy is growing steadily this is when the market is in the later stages of the market cycle. This is because investors and companies during this time both are investing money heavily with expectations of high returns. This is a high spend period.
4. Bear Market Mutual Funds –> Buy when prices are decreasing market-wide. These types of investments are usually utilizing short-term positions to make returns.

It is also important to note that different sectors (ex. medical, tech, etc.) can perform differently depending on what is happening with the overall economy. Do your research and see what sectors might be best for you to buy to help diversify your portfolio.

When To Sell Mutual Funds

Please, please, please, please do not try to buy and sell mutual funds to make a quick pretty penny. This strategy will just negatively impact you in the long-run. Instead, if you do have to sell your mutual fund, make sure you are doing it at the most tax-optimized time for you to sell. Also, make sure you weigh out all of the pros and cons before pulling the trigger and selling. Once you sell, any losses or gains become real.

The best times to sell your mutual funds are:

1. Only if you’ve owned the mutual fund for longer than one year. If you have owned the mutual fund for less than one year you will have to pay short-term capital gains tax which is taxed at ordinary income rate.
2. At the end of the year –> This helps optimize your taxes owed. All mutual funds sell their individual shares of different stocks all year long. When the fund sells the stock, if they are selling the stock for a higher price than what they bought it for, you the mutual fund owner, will have to pay capital gains tax on that profit at the end of the year (Nov/Dec).
3. To harvest losses in your portfolio –> This helps reduce your tax bill. You would want to consider harvesting losses in your portfolio only when you have major gains elsewhere in your portfolio. When you sell a mutual fund for less than what you bought it for, you can use that total loss to offset any capital gains tax you may owe to the government.
4. To rebalance your portfolio –> If you are too heavily invested in one asset class and the fund is one of your only options to sell to get your portfolio back in alignment with your strategy.
5. If the fund no longer is in alignment with your goals —> This could be due to change in fund managers, change in the fund’s investment strategy or if the fund is too large. You originally chose to invest in that fund for specific reasons. Well, if those reasons that made you invest are changing then it might be time to reconsider if you want your money parked there.
6. When a fund consistently underperforms –> Meaning for 1.5+ years. You don’t want to consider a fund underperforming if it hasn’t given you high returns for a couple months because that could be the timing of the fund managers selling off certain positions. However, if there have been consistent negative returns for over 1.5 years, then it might be time to consider selling.

One last thing to keep in mind when selling a mutual fund is something called back-end loads. Mutual funds come with sales fees. They either are charged to you when you buy the fund (called front-end loads) or when you sell the fund (back-end loads). If you own mutual funds with back-end loads just keep in mind that it will have to come out of your payout.

Final Thoughts

Well, I hope you learned something through this article about when to buy and sell mutual funds. Really the most important thing to understand is to not panic and to do your research. If you abide by those rules, you cannot go wrong. Whether you choose to invest in mutual funds or not, I wish you and your portfolio the best of luck in these volatile times.

Do you currently own mutual funds? If so, let us know what your favorites are in the comments below! 

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Gina DiMasi

Gina DiMasi is an organizational finance whiz. Gina is an avid investor, educator and aficionado of bitcoin and other modern investments. In addition to being an all around nice person, Gina has a degree in personal finance studies from Framingham State University. When she's not running numbers or blogging up a storm, Gina actively volunteers with Habitat for Humanity.