Withdrawing cash from investment: take money from underperforming fund?
It looks like the advice the rep is giving is based primarily on the sunk cost fallacy; advice based on a fallacy is poor advice. Bob has recognised this trap and is explicitly avoiding it. It is possible that the advice that the rep is trying to give is that Fund #1 is presently undervalued but, if so, that is a good investment irrespective if Bob has lost money there before or even if he has ever had funds in it. "The root of the advice Bob is being given is from the premise that the market is temporarily down.    If the market is temporarily down, then the stocks in ""Fund #1"" are on-sale and likely to go up soon (soon is very subjective).     If the market is going to go up soon (again subjective) you are probably better in fictitious Fund #1.    This is the valid logic that is being used by the rep.   I don't think this is manipulative based on costs.    It's really up to Bob whether he agrees with that logic or if he disagrees with that logic and to make his own decision based on that. If this were my account, I would make the decision on where to withdraw based on my target asset allocation. Bob (for good or bad reasons) decided on 2/3 Fund 1 and 1/3 Fund 2. I'd make the withdraw that returns me to my target allocation of 2/3 Fund 1 and 1/3 Fund 2. Depending on performance and contributions, that might be selling Fund 1, selling Fund 2, or selling some of both." "Bob should treat both positions as incomplete, and explore a viewpoint which does a better job of separating value from volatility. So we should start by recognizing that what Bob is really doing is trading pieces of paper (say Stocks from Fund #1 or Bonds from Fund #2, to pick historically volatile and non-volatile instruments.*) for pieces of paper (Greenbacks).  In the end, this is a trade, and should always be thought of as such.  Does Bob value his stocks more than his bonds?  Then he should probably draw from Fund #2.  If he values his bonds more, he should probably draw from Fund #1. However, both Bob and his financial adviser demonstrate an assumption: that an instrument, whether stock bond or dollar bill, has some intrinsic value (which may raise over time).  The issue is whether its perceived value is a good measure of its actual value or not. From this perspective, we can see the stock (Fund #1) as having an actual value that grows quickly (6.5% - 1.85% = 4.65%), and the bond (Fund #2) as having an actual value that grows slower (4.5% - 1.15$ = 3.35$).  Now the perceived value of the stocks is highly volatile.  The Chairman of the Fed sneezes and a high velocity trader drives a stock up or down at a rate that would give you whiplash. This perspective aligns with the broker's opinion.  If the stocks are low, it means their perceived value is artificially low, and selling it would be a mistake because the market is perceiving those pieces of paper as being worth less than they actually are.  In this case, Bob wins by keeping the stocks, and selling bonds, because the stocks are perceived as undervalued, and thus are worth keeping until perceptions change. On the other hand, consider the assumption we carefully slid into the argument without any fanfare: the assumption that the actual value of the stock aligns with its historical value.  ""Past performance does not predict future results.""  Its entirely possible that the actual value of the stocks is actually much lower than the historical value, and that it was the perceived value that was artificially higher.  It may be continuing to do so... who knows how overvalued the perceived value actually was!  In this case, Bob wins by keeping the bonds.  In this case, the stocks may have ""underperformed"" to drive perceptions towards their actual value, and Bob has a great chance to get out from under this market. The reality is somewhere between them.  The actual values are moving, and the perceived values are moving, and the world mixes them up enough to make Scratchers lottery tickets look like a decent investment instrument.  So what can we do? Bob's broker has a smart idea, he's just not fully explaining it because it is unprofessional to do so.  Historically speaking, Bobs who lost a bunch of money in the stock market are poor judges of where the stock market is going next (arguably, you should be talking to the Joes who made a bunch of money. They might have more of a clue.).  Humans are emotional beings, and we have an emotional instinct to cut ties when things start to go south.  The market preys on emotional thinkers, happily giving them what they want in exchange for taking some of their money.  Bob's broker is quoting a well recognized phrase that is a polite way of saying ""you are being emotional in your judgement, and here is a phrasing to suggest you should temper that judgement."" Of course the broker may also not know what they're doing!  (I've seen arguments that they don't!)  Plenty of people listened to their brokers all the way to the great crash of 2008.  Brokers are human too, they just put their emotions in different places.  So now Bob has no clear voice to listen to.  Sounds like a trap! However, there is a solution.  Bob should think about more than just simple dollars.  Bob should think about the rest of his life, and where he would like the risk to appear.  If Bob draws from Fund #1 (liquidating stocks), then Bob has made a choice to realize any losses or gains early... specifically now.  He may win, he may lose.  However, no matter what, he will have a less volatile portfolio, and thus he can rely on it more in the long run. If Bob draws from Fund #2 (liquidating bonds) instead, then Bob has made a choice not to realize any losses or gains right away.  He may win, he may lose.  However, whether he wins or loses will not be clear, perhaps until retirement when he needs to draw on that money, and finds Fund #1 is still under-performing, so he has to work a few more years before retirement.  There is a magical assumption that the stock market will always continue rewarding risk takers, but no one has quite been able to prove it! Once Bob includes his life perspective in the mix, and doesn't look just at the cold hard dollars on the table, Bob can make a more educated decision.  Just to throw more options on the table, Bob might rationally choose to do any one of a number of other options which are not extremes, in order to find a happy medium that best fits Bob's life needs: * I intentionally chose to label Fund #1 as stocks and Fund #2 as bonds, even though this is a terribly crude assumption, because I feel those words have an emotional attachment associated to them which #1 and #2 simply do not.  Given that part of the argument is that emotions play a part, it seemed reasonable to dig into underlying emotional biases as part of my wording.  Feel free to replace words as you see fit to remove this bias if desired." I think that Bob has good reasons for his planned spending and should follow his plan, not the dubious advice from an account rep. I think the advice Bob is being given is good. Bob shouldn't sell his investments just because their price has gone down. Selling cheap is almost never a good idea. In fact, he should do the opposite: When his investments become cheaper, he should buy more of them, or at least hold on to them. Always remember this rule: Buy low, sell high. This might sound illogical at first, why would someone keep an investment that is losing value? Well, the truth is that Bob doesn't lose or gain any money until he sells. If he holds on to his investments, eventually their value will raise again and offset any temporary losses. But if he sells as soon as his investments go down, he makes the temporary losses permanent. If Bob expects his investments to keep going down in the future, naturally he feels tempted to sell them. But a true investor doesn't try to anticipate what the market will do. Trying to anticipate market fluctuations is speculating, not investing. Quoting Benjamin Graham: The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell. Assuming that the fund in question is well-managed, I would refrain from selling it until it goes up again.
For index funds to be a poor investment, they would have to perform worse than your alternative investments.  In this case, we'll assume the alternative to be the individual stocks.  Obviously, it must be possible to pick just the winning stocks and avoid the losing stocks, raising your rate of return... however, several studies have shown that individuals are horrible at picking winners.  We let our emotions, are biases, and are suppositions get in the way.  You could literally throw a dart, but then you either win big or lose big.  Picking the fund evens that out for you, so you don't win or lose big, but just get a consistently boring (yet consistently good) return. If you have a lot of time to put into the research, and are confident in your ability to pick winning stocks, then you can do better than the index funds.  Otherwise, sticking with the index fund is probably a smart choice. "This may be more of a comment than an answer, but it's too long for a comment. Perhaps the Stackexchange Gods will forgive my impudence. That said: Even with the tax penalties, it can be to your advantage to put money into a ""retirement"" account and withdraw it before retirement. The trick is: Is the amount of the tax penalty more than the benefit of untaxed compound growth? For example, just to make up some numbers: Suppose you have $1000 of gross income to invest. You are considering whether to invest in an ordinary, non-tax favored account, or a classic IRA. Either way you will get 10% returns. Your tax rate, both when you put the money in and when you take it out, is 15%. There is a 10% tax penalty for early withdrawal. With an ordinary account you will pay 15% tax off the top, so you are only investing $850. Then each year 15% of your returns are paid in taxes, so your net return is 8.5%. But when you withdraw the money there are no additional taxes. With an IRA you do not pay any taxes up front, so you can invest the entire $1000. You collect 10% each year with no taxes. When you withdraw, you pay 15% plus the 10% penalty equals 25%. So after 5 years, the ordinary account would yield $850 x 1.085^5 = $1504. The IRA would yield $1000 x 1.1^5 x 0.75 = $1208. The tax penalty hurts. You are better to use the ordinary account. But if you could leave your money in for 25 years, then the ordinary account would yield $850 x 1.085^25 = $7687. The IRA would yield $1000 x 1.1^25 x 0.75 = $8126. The IRA, even with the tax penalty, is better. Of course my numbers are just made up. What your tax bracket is, what returns you get, and how long you think you might leave the money in the investment, all vary." Use TWIRR (aka TWRR). Time Weighted rate of return. It's sort of the opposite of XIRR. XIRR results change dramatically depending on the timing of the cashflows. It might be useful to also model returns that are unaffected by the timing. This is how funds report returns, and this number allows you to compare to funds and indices. During periods of steady deposits, XIRR will continually understate performance. And in retirement, when you have steady withdrawals, XIRR will overstate. TWRR is talked about here: http://www.dailyvest.com/PRR/prr_calcmethods.aspx#twrr I've made a simple spreadsheet that you can use as a starting point, if you like: http://moosiefinance.com/static/models/spreadsheets.html (top entry in the list) "Do mutual funds edit/censor underperforming investments to make their   returns look better, and if so, is there any way one can figure out if   they are doing it? No, that's not what the quote says. What the quote says is that the funds routinely drop investments that do not bring the expected return, which is true. That's their job, that is what is called ""active management"". Obviously, if you're measuring the fund by their success/failure to beat the market, to beat the market the funds must consistently select over-performers. No-one claims that they only select over-performers, but they select enough of them (or not...) for the average returns to be appealing (or not...) for the investors." In addition to what quid said, I think your risk tolerance should depend on how likely you are to need the funds in the near future. Say that you have $100k saved up and you want to decide how to invest it. Then you should ask yourself: The idea here is that if you invest say in stocks (high risk) then the value of your position could drop significantly and you'd potentially have to wait for a long time before it recovers. If you are forced to sell you could make a substantial loss. If you don't urgently need this cash, however, then you can feel relaxed and just wait for the market to reverse again. This is viewing risk through the lens of how likely it is that you'll have to wait a long time to get a substantial amount of your money back, which itself is a function of how likely it is for a substantial downturn to occur in a certain market. One strategy to consider is a well-diversified index fund of equities. These have historically averaged 7-8% real growth. So withdrawing 3% or 4% yearly under that growth should allow you to withdraw 30+ years with little risk of drawing down all your capital. As a bonus you're savings target would come down from $10 million to $2.5 million to a little under $3.5 million. "A dividend is a cash disbursement from the company.  The value of the company goes down the same amount of the dividend, so it is analogous to having money in a savings account and taking a withdrawal every month.  Obviously you are going to have less in the end than if you just kept the money in the account. suppose that I own 10 different stocks, and don't reinvest dividends, but keep them on account, and each month or two, as I add more money to invest, either in one of my existing stocks, or perhaps something new, I add whichever dividend amount is currently available in cash to my new purchase, would this strategy provide the same results? Roughly, yes.  Reinvesting dividends is essentially buying more stock at the lower price, which is a net zero effect in total balance.  So if you invested in the same stocks, yes you'd be in the same place.  If you invested in different stocks, then you would have a performance difference depending on what you invested in. The risk is the temptation to take the cash dividend and not reinvest it, but take it in cash, thereby reducing your earning power. That is, is there some particular reason that the brokers are recommending automatically reinvesting dividends as opposed to reinvesting them manually, perhaps not always in the same item? I'd like to think that they're looking after your best interest (and they might be), but the cynical part of me thinks that they're either trying to keep your business by increasing your returns, or there's some UK regulation I'm not aware of that requires them to disclose the effect of reinvesting dividends.    £100 invested in the UK stock market since 1899 would have grown into just £177 after adjusting for inflation. This figure seems ludicrous to me.  I haven't actually measured what the historical returns on the ""UK market"" are, but that would mean an annualized return (adjusted for inflation) of just 0.5%.  Either UK stocks pay a ridiculous amount of dividends or there's something wrong with the math. EDIT I still have not found a definitive source for the real UK market return, but according to this inflation calculator, £100 in 1899 would equate to almost £12,000 today, for an average inflation rate of 4.14 percent, which would put the CAGR of the UK market at about 4.9%, which seems reasonable.  The CAGR with dividend reinvestment would then be about 9.1%, making dividend reinvestment a no-brainer in the UK market at least." My take is that he can avoid a big tax hit by leaving it as and giving   the untouched fund to the heirs. 100% correct. By withdrawing now he'll be subjected to the income tax on the gains. Since his gains are almost the whole value of the account, he'll actually find himself in the highest bracket, not the lowest as Joe suggests. Not only that, but his SS income will become taxable as well. Capital gains are included in the AGI. By leaving as is, the heirs will get stepped up basis, and the whole 700K will not be taxed (its below the estate tax threshold, and the basis for the heirs will be the value at death). "Your only real alternative is something like T-Bills via your broker or TreasuryDirect or short-term bond funds like the Vanguard Short-Term Investment-Grade Fund.  The problem with this strategy is that these options are different animals than a money market. You're either going to subject yourself to principal risk or lose the flexibility of withdrawing the money. A better strategy IMO is to look at your overall portfolio and what you actually want. If you have $100k in a money market, and you are not going to need $100k in cash for the forseeable future -- you are ""paying"" (via the low yield) for flexibility that you don't need. If get your money into an appropriately diversified portfolio, you'll end up with a more optimal return. If the money involved is relatively small, doing nothing is a real option as well. $5,000 at 0.5% yields $25, and a 5% return yields only $250. If you need that money soon to pay tuition, use for living expenses, etc, it's not worth the trouble." "If I invest in individual stocks I will, from time to time, sell stocks that aren't performing well. If the value of my portfolio has gone up by 10%, then the value of my portfolio has gone up by 10%, regardless of whether selling those stocks is labeled as ""delete[ing] failures"". Same thing for mutual funds: selling underperforming stocks is perfectly ordinary, and calling it ""delete[ing] failures"" in order to imply some sort of dishonesty is simply dishonest." You can't just move money out at will because of IRS rules for the account. However, you do seem to qualify for hardship.  &gt; I investigated a hardship withdrawal, the amount I would be allowed to withdraw was $75.00  You need to look into this more. Normally with a hardship withdrawl, you can pull out what you need. Ask your HR why it is you have a $75.00 limit. We really can't answer.  Also, this question is really for /r/personalfinance . This subreddit is about investing. For such a small amount, I really don't think it's worth the time and effort to withdraw it. Why not roll it over into a traditional IRA or a new 401k / 403b? I can make withdrawals immediately, 2x per month. I wasn't told the money would be tied up. And also, although it doesn't count for much, I'd like to trade under a formal prop firm just so I could put it on my resume, people wouldn't put much weight on performance in a retail account. Atleast, I don't believe so, I could be wrong Vanguard (and probably other mutual fund brokers as well) offers easy-to-read performance charts that show the total change in value of a $10K investment over time.  This includes the fair market value of the fund plus any distributions (i.e. dividends) paid out.  On Vanguard's site they also make a point to show the impact of fees in the chart, since their low fees are their big selling point. Some reasons why a dividend is preferable to selling shares: no loss of voting power, no transaction costs, dividends may have better tax consequences for you than capital gains. NOTE:  If your fund is underperforming the benchmark, it is not due to the payment of dividends.  Funds do not pay their own dividends; they only forward to shareholders the dividends paid out by the companies in which they invest.  So the fair market value of the fund should always reflect the fair market value of the companies it holds, and those companies' shares are the ones that are fluctuating when they pay dividends. If your fund is underperforming its benchmark, then that is either because it is not tracking the benchmark closely enough or because it is charging high fees.  The fact that the underperformance you're seeing appears to be in the amount of dividends paid is a coincidence. Check out this example Vanguard performance chart for an S&P500 index fund.  Notice how if you add the S&P500 index benchmark to the plot you can't even see the difference between the two -- the fund is designed to track the benchmark exactly.  So when IBM (or whoever) pays out a dividend, the index goes down in value and the fund goes down in value. I think you are having trouble understanding what 'liquid' means. Liquidity refers to how easily an asset can be converted to cash. More liquid = more easily converted to cash, less liquid, less so. Any kind of exit load is going to make an asset less liquid due to the penalties associated with making the sale. So, the whole point of liquid funds is to give people the option of selling quickly if they need to. Since an exit load is meant to discourage this behavior, liquid funds tend not to have one. The point isn't what the financial institution 'gets', it's about offering a service to clients with a particular investment need.