9
votes
How does mutual fund pricing work when selling?
A very newbie question to which I'm having a hard time finding a clear answer (and I don't want to read a dissertation on how the stock market works).
I'm planning to sell my FZROX (FIDELITY ZERO TOTAL MARKET INDEX FUND) shares.
Fidelity states "This trade will be completed at the next available price.".
Does this mean the estimated value could be much lower than it currently is when it "sells"?
e.g. Currently priced at $10,000 when I put in the order to sell, but sold on next pricing when value drops to $7,000 because market.
That’s not a mutual fund. You have a share of an index fund. These shares trade like any other stock. You can’t execute it right now because it’s after market hours.
That depends on whether you set a limit trade or a market trade. A market sell will sell at whatever the market price is when the market opens. A limit trade, you set the minimum acceptable price. It won’t sell below that. If you don’t remember it was probably a market trade.
In which case, yes, your hypothetical could happen.
If you’re worried just cancel the trade and wait until tomorrow when the markets are open again. Limit trades are also good if you’re paranoid. That being said, something like a total market index fund isn’t going to have that much volatility.
FZROX is a mutual fund - index funds can be either mutual funds, or exchange traded funds (ETFs) - ETF shares trade like stocks, but mutual fund shares do not - mutual fund trade orders entered during the day are executed at the end of the day at the closing NAV (net asset value - basically the sum of the closing prices of all the funds holdings for that day) of the fund.
Because of this, mutual funds are also only priced once a day, and then show the last price until the next change - for example all day Monday your holdings in a mutual fund will normally still show with the last Friday's closing price. If the market for some reason had a huge drop on Monday, you might not see it reflected in the mutual fund prices yet, and if you place a sell order on Monday, and have not been paying attention to the market, the eventual fill price at the end of the day may be much lower than expected.
Mutual funds are best suited for people who are not trying to time the market (which I would argue should be most individual investors) - worrying over intraday moves of broad stock indexes is not very productive, and trying to chase prices has at best zero expected return (it's very hard to predict the next moves of the stock market) - and usually negative expected return (due to various psychological/behavioral patterns, trading costs, adverse selection, etc.)
I would say it's totally fine to put a market sell order for an index mutual fund like FZROX at any point during the day for almost anyone holding that fund and not worry about the price or limit orders. Yes, the price can end up higher or lower when the order is eventually filled, but that is part of the risk of owning stocks and there is no easy or simple way to guarantee a better price - the price you will get will be as fair as you can hope for in the market (this is not necessarily always true for all ETFs or individual stocks, where you might have to worry about liquidity and avoid trading during certain times, which is why mutual funds are simpler and safer to use for people who do not necessarily have a lot of trading knowledge)
Thanks for clarifying. I wasn't sure about mutual funds vs index funds as both terminology was used on my portfolio. I tried using a more generic term so as to not mislead people with the title if I was wrong.
And yes, I chose FZROX because of my limited trading knowledge. I wanted something that was "set and forget" which would at least keep up with inflation. But I've learned this isn't the best investment for this kind of thing. A CD would've been a better choice.
Lookup something called the "Boglehead" investment philosophy, and I would really recommend reading a good introductory book - see here or their wiki for some recommendations for example - it's really important to have at least some fundamental knowledge about things like different asset classes, types of risk and investment time horizons before putting money into the market.
Making rash moves in the markets is how people lose a lot of money - the Boglehead approach calls for spending some time beforehand understanding the basics and establishing a personal investment policy, finding out about your risk tolerance, investment time horizons and desired asset allocation, and a best way to stay on target and not getting affected by emotions, and rattled by short term market moves.
Both FZROX and CDs can be excellent in keeping up with inflation, depending on the situation, especially the time horizon and the interest rate environment. Both are exposed to different kinds of risks. If this is money you will need in the next 2-5 years, then CDs are likely the way to go right now - you can lock in a known yield, FDIC insured, and while there is no guarantee they will beat inflation over the next X years, but at the current rates and inflation trends they likely will. On the other hand money for retirement, especially if it's still decades out, probably shouldn't be in CDs, and FZROX is much more likely to significantly beat inflation over that time period - but it can experience much more dramatic swings both up and down during that time, and again, there is no guarantee.
The choice is not really trivial without understanding the risks involved, your own risk tolerance, and your investment objectives.
Absolutely! At the time of investment I didn't think the risks through. These funds need to be more liquid as they're a down-payment towards a house. But I've learned this kind of investment is a very bad decision for something like this. Thus wishing I thought a bit harder and chose a CD instead.
You could look into lifecycle (target retirement) funds too. Basically you pick a year for retirement, and the fund managers manage it to match the expectations/standards for each part of life, i.e. if you are young they will focus the fund on growth, as you age they will shift it towards more stable/dividend (income) investments.
VTIVX, Vanguard Target Retirement 2045 Fund would be a concrete example.
Yep, I did that research when I started on my retirement accounts. Based on some reading I chose VTSAX over a target retirement fund as I'm still relatively young and my risk tolerance is higher (~30+ years from retirement).
At 30+ years to retirement, an all stock fund like VTSAX is gonna perform pretty close to the same as target date funds. It’s as you get closer to retirement that the TR funds rebalance to include lower risk bonds, which you should be doing anyway when the time comes.
I don’t personally have TR funds myself, but rather a basic three index fund portfolio for retirement, with domestic and international equities making up the majority, and bonds for the balance to meet the appropriate level of risk for my age. And I rebalance annually. I do this so I can give myself a slightly higher level of risk tolerance and slightly lower fees than the TR.
TR funds are probably the right choice for most people.
I appreciate the answer! I'm not in a hurry to sell, but this is good info to know when the time comes.
It's funny how Fidelity has all these resources on "limit trades/etc." but no guide on how to actually do it.
Oh, I had thought you put in a sell order after market hours and Fidelity told you that.
Yes, your hypothetical is correct for market sells. That being said, unless whatever you're trading has insanely high volatility, it's unlikely to matter. A total market index fund would only move by, say, 30% if the ENTIRE US stock market dropped 30% within the fractions of a second you pressed "sell". But to be safe, you can always use limit sells - it'll just be more work.
"What Are Index Funds?
"An index fund is a type of mutual fund"
You've pretty much got it - that's a downside to owning a mutual fund. This is one reason Exchange Traded Funds (ETFs) are popular - you can sell in the middle of the day, like a stock.
If you want to minimize your risk of getting a bad day on the market, sell only a portion at a time and spread it out over several days. That's generally a good idea overall because it's really hard to time daily market swings anyway.
This is similar to the advice I heard when buying stocks and you have a lot of money you'd like to invest. Say you have 70k you'd like to invest. Spending it all in the same day might not be the best idea as the market might be good for buyers the next day. Works the same way when selling I see.
Is that really the case though?
When you're investing large sums as a casual, long-term investor, it's all about buying/selling at approximately the right time. The risk is much, much higher if you're trying to buy/sell at exactly the perfect time. The upside is much smaller than the added risk.
If you think now's the time for buying, buy. Those conditions might change rapidly in either direction, especially due to the current world economy and unstable situation. As casual sellers, we cannot expect to beat the market substantially because professionals spend way, way more time on gathering detailed data to inform their trades.
In a handful of days the situation in Ukraine might change substantially and the world markets along with it. I don't think you nor I should take that risk for minor potential upsides at time of buying/selling. Why would we beat the market on these sorts of situations?
I meant spreading/mitigating the risk over a time period instead of investing everything the same day. I didn't mean to imply that you should time the market for the right buy conditions.